An examination of the effect of stock market liquidity on bank market power

This paper investigates the spillover effects of aggregate stock market liquidity on bank market power using a sample of 44 countries and 7297 individual banks from 1999 to 2014. Country-level and bank-level analysis shows that enhancement in stock market liquidity strengthens the market power of the banking sector. This relationship is more pronounced in developed market countries and in countries with common law origin, which offer better investor protection. To the best of our knowledge, this is the first paper to provide comprehensive empirical evidence of the complementary relationship between banks and stock markets, providing important policy implications for regulators