Advertisement

The Impact of Market Power on Bank Risk-Taking: an Empirical Investigation

  • Ferdaous BahriEmail author
  • Taher Hamza
Article
  • 31 Downloads

Abstract

There has been a great deal of interest in investigating banks’ risk-taking incentives because of their relevant role in the stability of the financial system. Until now, we know relatively little about what gives rise to such risk-taking in the first place. In this paper, we seek to examine the impact of market power on risk-taking behavior of banks in 5 European countries between 2002 and 2015. Our main results suggest that greater competition leads to the instability of the financial system, since the measure of bank competition is significantly positively related to the Z score. In addition, we find that a stronger economic growth is associated with more stabilized bank asset returns, but this stabilizing force is stopped when market power is more pervasive in the economy. During the global financial crisis period, banks in less competitive markets exhibit higher bank credit risk. We also verify that after the implementation of Basel III, market power has a positive impact on bank risk-taking and in a stronger way in comparison with the pre-Basel III.

Keywords

Financial stability Risk-taking Market power Basel III 

Notes

Compliance with Ethical Standards

This study was not funded by any organization.

Conflict of Interest

All the authors declare that they have no conflict of interest.

References

  1. Adjei-Frimpong, K., Gan, C., & Hu, B. (2016). Competition in the banking industry: empirical evidence from Ghana. Journal of Banking Regulation, (3), 159–175.Google Scholar
  2. Agoraki, M., Delis, M. D., & Pasiouras, F. (2011). Regulations, competition and bank risk taking in transition countries. Journal of Financial Stability, 7, 38–48.CrossRefGoogle Scholar
  3. Allen, F., & Gale, D. (2004). Competition and financial stability. Journal of Money, Credit, and Banking, 36(3), 453–480.CrossRefGoogle Scholar
  4. Altunbas, Y., Gambacorta, L., & Marques-Ibanez, D. (2010). Bank risk and monetary policy. Journal of Financial Stability, 6, 121–129.CrossRefGoogle Scholar
  5. Ariss, R. T. (2010). On the implications of market power in banking: evidence from developing countries. Journal of Banking and Finance, 34(4), 765–775.CrossRefGoogle Scholar
  6. Babihuga, R. (2007). Macroeconomic and financial soundness indicators: an empirical investigation. In IMF working paper WP/07/115.Google Scholar
  7. Basel Committee on Banking Supervision. (2010). An assessment of the long-term economic impact of stronger capital and liquidity requirements.Google Scholar
  8. Basel Committee on Banking Supervision. (2011). Global systemically important banks: assessment methodology and the additional loss absorbency requirement. Rules text, Bank for International Settlements.Google Scholar
  9. Beck, T., Demirguc-Kunt, A., & Levine, R. (2003). Law, endowments, and finance. Journal of Financial Economics, 70, 137–181.CrossRefGoogle Scholar
  10. Beck, T., Demirguc-Kunt, A., & Levine, R. (2006). Bank concentration, competition, and crises: first results. Journal of Banking and Finance, 30(5), 1581–1603.CrossRefGoogle Scholar
  11. Beck, T., Levine, R., & Levkov, A. (2010). Big bad banks? The winners and losers from bank deregulation in the United States. The Journal of Finance, 2010 65 (5): 1637–1667.Google Scholar
  12. Beck, T., Olivier, D. J., & Glenn, S. (2013). Bank competition and stability: cross-country heterogeneity. Journal of Financial Intermediation, 22(2), 218–244.CrossRefGoogle Scholar
  13. Berger, A. N., & Bouwman, C. H. S. (2009). Bank capital, survival, and performance around financial crises. In Working paper. MIT, Wharton Financial Institutions Center.Google Scholar
  14. Berger, A. N., Klapper, L. F., & Turk-Ariss, R. (2009). Bank competition and financial stability. Journal of Financial Services Research, 35, 99–118.CrossRefGoogle Scholar
  15. Bernanke, B. (1983). Nonmonetary effects of the financial crisis in the propagation of the Great Depression. American Economic Review, 73, 257–276.Google Scholar
  16. Bolton, P., Mehran, H., & Shapiro, J. (2015). Executive Compensation and Risk Taking. Review of Finance, 19, 2139–2181.Google Scholar
  17. Boyd, J. H., & Runkle, D. E. (1993). Size and performance of banking firms—testing the predictions of theory. Journal of Monetary Economics, 31(1), 47–67.CrossRefGoogle Scholar
  18. Boyd, J. H., & Nicoló, G. D. (2005). The theory of bank risk taking and competition revisited. The Journal of Finance, 60(3), 1329–1343.CrossRefGoogle Scholar
  19. Boyd, J., De Nicolo, G. & Jalal, A. (2006). Bank risk taking and competition revisited: new theory and new evidence. In: Working paper WP/06/297 International Monetary Fund, Washington, DC.Google Scholar
  20. Boyd, J. H., Nicolò, G. D., & Jalal, A. (2009). Bank competition, risk and asset allocations. In IMF working papers 09/143. International Monetary Fund.Google Scholar
  21. Bresnahan, T. F. (1982). The oligopoly solution concept is identified. Economic Letters, 10, 87–92.CrossRefGoogle Scholar
  22. Brewer, E., III, & Saidenberg, M. R. (1996). Franchise value, ownership structure, and risk at savings institutions. Federal Reserve Bank of New York Research Paper 9632.Google Scholar
  23. Brownbridge, M., & Kirkpatrick, C. (1999). Financial sector regulation: the lessons of the Asian crisis. Development Policy Review, 17, 243–266.CrossRefGoogle Scholar
  24. Calomiris, C., & Mason, J. (1997). Contagion and bank failures during the Great Depression: the Chicago Banking Panic of June 1932. American Economic Review, 87, 863–884.Google Scholar
  25. Calomiris, C., & Mason, J. (2003). Consequences of U.S. bank distress during the Depression. American Economic Review, 93, 937–947.CrossRefGoogle Scholar
  26. Campbell, J. L. (2007). Why would corporations behave in socially responsible ways? An institutional theory of corporate social responsibility. Academy of Management Review, 32, 946–967.CrossRefGoogle Scholar
  27. Casu, B., & Girardone, C. (2006). Bank Competition, concentration and efficiency in the single European market. The Manchester School, 2006- Wiley Online Library.Google Scholar
  28. Casu, B., & Girardone, C. (2009). Testing the relationship between competition and efficiency in banking: a panel data analysis. Economics Letters, 105(1), 134–137.CrossRefGoogle Scholar
  29. Chalermchatvichien, P., Jumreornvong, S., & Jiraporn, P. (2014). Basel III, capital stability, risk taking, ownership: evidence from Asia (Vol. 28, pp. 28–46).Google Scholar
  30. Chen, M., Jeon, B. N., Wang, R., & Wu, J. (2015). Corruption and bank risk-taking: evidence from emerging economies. Emerging Markets Review.Google Scholar
  31. Claessens, S., & Laeven, L. (2004). What drives bank competition? Some international evidence. Journal of Money, Credit and Banking, 36(3), 563–583.CrossRefGoogle Scholar
  32. De Nicolò, G., Bartholomew, P., Zaman, j., & Zephirin, M. (2004). Bank Consolidation, Internationalization and Conglomeration: Trends and Implications for Financial Risk. Financial Markets, Institutions & Instruments, 13(4), 173–217.Google Scholar
  33. Demirgüç-Kunt, A., & Detragiache, E. (1998). The determinants of banking crises in developing and developed countries. Staff papers, 1998. Springer.Google Scholar
  34. Demirguc-Kunt, A., & Huizinga, H. (2010). Bank activity and funding strategies: the impact on risk and returns. Journal of Financial Economics, 98, 626–650.CrossRefGoogle Scholar
  35. Demsetz, R. S., Saindenberg, M. R., & Strahan, P. E. (1996). Banks with something to lose: the disciplinary role of franchise value. FRBNY Economic Policy Review, 2(2), 1–14.Google Scholar
  36. Farhi, E., & Tirole, J. (2012). Collective moral hazard, maturity mismatch, and systemic bailouts. American Economic Review, 102, 60–93.Google Scholar
  37. Fernández de Guevara, J., Maudos, J., & Pérez, F. (2005). Market power in European banking. Journal of Financial Services Research, 27(2), 109–138.CrossRefGoogle Scholar
  38. Gan, J. (2004). Banking market structure and financial stability: evidence from the Texas real estate crisis in the 1980s. Journal of Financial Economics, 73(3), 567–601.CrossRefGoogle Scholar
  39. Gennaioli, N., Shleifer, A., & Vishny, R. (2012). Neglected risks, financial innovation, and financial fragility. Journal of Financial Economics., 104, 452–468.Google Scholar
  40. Godlewski, C. J. (2005). Bank capital and credit risk taking in emerging market economies. Journal of Banking Regulation, 6, 128–145.CrossRefGoogle Scholar
  41. Gujarati, D.N. (2004). Basic econometrics. 4th ed.Google Scholar
  42. Hall, R. E. (1988). The relation between price and marginal cost in U.S. industry. Journal of Political Economy, 96(5), 921–947.CrossRefGoogle Scholar
  43. Hall, A. R. (2005). Generalized method of moments. Oxford: Oxford University Press.Google Scholar
  44. Hellmann, T. F., Murdock, K., & Stiglitz, J. (2000). Liberalization, moral hazard in banking and prudential regulation: are capital requirements enough? American Economic Review, 90, 147–165.CrossRefGoogle Scholar
  45. Houston, J. F., Lin, C., Lin, P., & Ma, Y. (2010). Creditor rights, information sharing, and bank risk taking. Journal of Financial Economics, 96(3), 485–512.CrossRefGoogle Scholar
  46. Iwata, G. (1974). Measurement of conjectural variations in oligopoly. Econometrica, 42, 947–966.CrossRefGoogle Scholar
  47. Jiménez, G., Lopez, J. A., & Saurina, J. (2013). How does competition impact bank risk- taking? Journal of Financial Stability, 9, 185–195.CrossRefGoogle Scholar
  48. Jorda, O., Schularick, M., & Taylor, A. M. (2013). When Credit Bites Back. Journal of Money, Credit, and Banking, 45(s2), 3–28.Google Scholar
  49. Kane, E. J. (1986). Appearance and Reality in Deposit Insurance: The Case for Reform. Journal of Banking and Finance, 10, 175–188.CrossRefGoogle Scholar
  50. Kasman, S., & Kasman, A. (2015). Bank competition, concentration and financial stability in the Turkish banking industry. Economic Systems, 39(3), 502–517.CrossRefGoogle Scholar
  51. Kaufmann, D., Kraay, A., & Mastruzzi, M. (2008). Governance matters VII: aggregate and individual governance indicators 1996–2007. Working paper series (p. 4654). Washington, DC: World Bank.CrossRefGoogle Scholar
  52. Keeley, M. C. (1990). Deposit insurance, risk and market power in banking. American Economic Review, 80, 1183–1200.Google Scholar
  53. Laeven, L., & Levine, R. (2009). Bank governance, regulation and risk taking. Journal of Financial Economics, 93, 259–275.CrossRefGoogle Scholar
  54. Lau, L. (1982). On identifying the degree of competitiveness from industry price and output data. Economic Letters, 10, 93–99.CrossRefGoogle Scholar
  55. Lee, C. C., & Hsieh, M. (2013). Beyond bank competition and profitability: can moral hazard tell us more? Journal of Financial Services Research, 44(1), 87–109.CrossRefGoogle Scholar
  56. Liu, H., Molyneux, P., & Nguyen, L. H. (2012). Competition and risk in South East Asian commercial banks. Applied Economics, 44(28), 3627–3644.CrossRefGoogle Scholar
  57. Marcucci, J., & Quagliariello, M. (2009). Asymmetric effects of the business cycle on bank credit risk. Journal of Finance and Banking, 33, 1624–1635.CrossRefGoogle Scholar
  58. Martinez-Miera, D., & Repullo, R. (2010). Does competition reduce the risk of bank failure? Review of Financial Studies, 23(10), 3638–3664.CrossRefGoogle Scholar
  59. Mishkin, F. S. (1999). Financial consolidation: dangers and opportunities. Journal of Banking and Finance, 23, 675–691.CrossRefGoogle Scholar
  60. Moshirian, F. (2009). Can Asia Pacific community similar to the European community emerge? Journal of Banking and Finance, 33, 2–8.CrossRefGoogle Scholar
  61. Neter, J., Wasserman, W., & Kutner, M. H. (1989). Applied Linear regression Models (2nd ed.). IL: Irwin Homewood.Google Scholar
  62. Ojo, M., (2010). Basel III and Responding to the Recent Financial Crisis: Progress Made by the Basel Committee in Relation to the Need for Increased Bank Capital and Increased Quality of Loss Absorbing Capital. Kindle Direct Publishing April 2014.Google Scholar
  63. Panzar, J. C., & Rosse, J. N. (1987). Testing for Monopoly Equilibrium. Journal of Industrial Economics, 35, 443–456.Google Scholar
  64. Park, K. (2009). Has bank consolidation in Korea lessened competition? The Quarterly Review of Economics and Finance, 49, 651–667.CrossRefGoogle Scholar
  65. Pennacchi, G. G. (1987). A reexamination of the over- (or under-) Pricing of deposit insurance. Journal of Money, Credit and Banking, 19, 340–360.CrossRefGoogle Scholar
  66. Perotti, E., & Suarez, J. (2003). Last bank standing: what do I gain if you fail? European Economic Review, 46(9), 1599–1622.CrossRefGoogle Scholar
  67. Peters, G. (2013). One step forward. Business Strategy Review, 24, 54–57.CrossRefGoogle Scholar
  68. Roeger, W. (1995). Can imperfect competition explain the difference between primal and dual productivity measures? Estimates for U.S. manufacturing. Journal of Political Economy, 103(2), 316–330.CrossRefGoogle Scholar
  69. Roodman, D. (2007). A short note on the theme of too many instruments. Working paper (p. 125). Washington DC: Centre for Global Development.Google Scholar
  70. Rosse, J. N., & Panzar, J. C. (1977). Chamberlin vs. Robinson: An empirical test for monopoly rents, Studies in Industry Economics no.77. Stanford, CA: Department of Economics, Stanford University.Google Scholar
  71. Roy, A. D. (1952). Safety first and the holding of assets. Econometrica, 20, 431–449.CrossRefGoogle Scholar
  72. Salas, V., & Saurina, J. (2003). Deregulation, market power and risk behavior in Spanish banks. European Economic Review, 47, 1061–1075.CrossRefGoogle Scholar
  73. Saadaoui, Z. (2014). Business cycle, market power and bank behaviour in emerging countries. International Economics, 139, 109–132.CrossRefGoogle Scholar
  74. Saunders, A. & Wilson, B. (1996). Bank capital structure: charter value and diversification effects. Working paper S-96-52. New York University Salomon Center.Google Scholar
  75. Schaeck, K., & Cihak, M. (2012). Bank competition and capital ratios. European Financial Management, 18(5), 836–866.CrossRefGoogle Scholar
  76. Schaeck, K., & Cihak, M. (2014). Competition, efficiency, and stability in banking. Financial Management, 43, 215–241.CrossRefGoogle Scholar
  77. Schaeck, K., Cihak, M., Maechler, A. & Stolz, S.(2011). Who disciplines bank managers? Review of finance.Google Scholar
  78. Scott, J. A., & Dunkelberg, W. C. (2010). Competition for small firm banking business: bank actions versus market structure. Journal of Banking and Finance, 34(11), 2788–2800.CrossRefGoogle Scholar
  79. Soedarmono, W., Machrouh, F., & Tarazi, A. (2011). Bank market power, economic growth and financial stability: evidence from Asian banks. Journal of Asian Economics, 22(6), 460–470.CrossRefGoogle Scholar
  80. Soedarmono, W., Machrouh, F. & Tarazi, A. (2013). Bank competition, crisis and risk taking: evidence from emerging markets in Asia. Journal of International Financial Markets Institutions and Money, 23(0), 196–221.Google Scholar
  81. Tabak, B. M., & Tecles, P. L. (2010). Estimating a Bayesian stochastic frontier for the Indian banking system. International Journal of Production Economics, 125(1), 96–110.CrossRefGoogle Scholar
  82. Tabak, B. M., Fazio, D. M., & Cajueiro, D. O. (2012). The relationship between banking market competition and risk-taking: do size and capitalization matter? Journal of Banking and Finance, 36(12), 3366–3381.CrossRefGoogle Scholar
  83. Tabak, B. M., Gomes, G. M. R., & Medeiros, M., Jr. (2015). The impact of market power at bank level in risk-taking: the Brazilian case. International Review of Financial Analysis, 40, 154–165.CrossRefGoogle Scholar
  84. Teplý, P., Diviš, K., & Černohorská, L. (2012). Economic Capital and Risk Management (p. 2012). Prague: Karolinum Press.Google Scholar
  85. Yildirim, H., & Philippatos, G. (2007). Restructuring, consolidation and competition in Latin America banking markets. Journal of Banking and Finance, 31, 629–639.CrossRefGoogle Scholar
  86. Vazquez, F., & Federico, P. (2015). Bank funding structures and risk: evidence from the global financial crisis. Journal of Banking and Finance, 61, 1–14.CrossRefGoogle Scholar
  87. Wagner, W. (2010). Loan market competition and bank risk-taking. Journal of Financial Services Research, 37(1), 71–81.CrossRefGoogle Scholar
  88. Walker, M. (2013). The Basel III accord and the European system of financial supervision:policy prescriptions for an inadequately regulated common market. Journal of Public and International Affairs, 23, 134–149.Google Scholar
  89. Went, P., (2010). Basel III Accord: Where Do We Go from Here? Working Paper. GARP Research Center.Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Institut Supérieur de GestionUniversité de SousseSousseTunisia
  2. 2.LAMIDEDUniversity of SousseSousseTunisia
  3. 3.Institut des Hautes Etudes CommercialeUniversity of CarthageCarthageTunisia
  4. 4.VALOREMUniversité d’OrléansOrléansFrance

Personalised recommendations