Does foreign bank entry intensify competition among Indonesian banks? The moderating roles of efficiency and risk

This study investigates the impact of foreign bank penetration on competition in Indonesia’s banking sector and how this effect is conditional on bank efficiency and risk. The Lerner index measures competition, while foreign penetration is proxied by the ratio of foreign banks’ assets to total industry assets. Using monthly data for 95 banks from January 2016 to April 2022, we apply a system GMM estimator to address endogeneity, with a random-effects model for robustness. The results show that greater foreign bank presence reduces the Lerner index, indicating a pro-competitive effect that becomes stronger when domestic banks are more efficient. In contrast, higher risk weakens this effect, with riskier banks retaining greater market power. For regulators, policies should encourage foreign bank presence while focusing on supervisory frameworks that enhance efficiency and strengthen risk management. Furthermore, banks can enhance their competitiveness by enhancing operational efficiency and minimizing credit risk.