Market Power and Risk-Taking of Banks: New Consolidating Evidence from Emerging Economies
38 Pages Posted: 25 Jan 2019
Date Written: November 15, 2018
This paper investigates the competition-stability puzzle in the banking market and provides new consolidating evidence at the bank level. Using bank-level data from 35 emerging economies during the period of 2000-2014, we investigate the impact of market power of banks on their risk-taking behavior. We set up a semiparametric model of the market power-bank risk nexus, conduct estimation by applying the Bayesian inference, and provide consistent evidence that there is a significant nonlinear relationship between market power and risk-taking of banks. Bank stability is found to be bolstered with higher market power, but this relationship tends to weaken and even reverse as banks’ market power grows over a threshold level. Our empirical findings support the “competition-fragility” view of the relationship between market power and banks’ risk-taking, until the “competition-stability” view comes into effect when banks’ market power increases to a very high level. We also discuss useful policy implications based on these empirical findings.
Keywords: market power, bank risk-taking, emerging economies
JEL Classification: G21, G15, D53
Suggested Citation: Suggested Citation