The role of financial development in the impact of bank stability and bank concentration on industry value added

This article investigates the role of financial development in the impact of bank stability and bank concentration on industry’s value added using the smooth transition regression model (STR) as one of the most prominent regime switching models, over the period 1981 to 2014. To this end, we used the provided financial resources as a percentage of GDP as an indicator of financial development and transition variable. To calculate the concentration and stability indexes, we used three largest banks within that industry and z-score index, respectively. Linearity test results indicate the nonlinearity between the variables. The results show that the threshold level is 15.69% and estimated slope parameter is 0.255. In the first regime, bank stability has a positive impact on industry’s value added, but the impact of bank concentration is negative and significant. In the second regime, at the high levels of financial development, stability and concentration have a different effect from the previous regime. In other words, at the higher levels of financial development, bank stability has a negative impact on industry’s value added, but the impact of bank concentration is positive.