Bank Risk, Bank Competition and Monetary Policy in the Indian Banking Industry: A Panel Quantile Regression Approach

Abstract

This study examines the relationship between monetary policy (MP), bank competition and risk-taking behavior for 69 commercial banks in India between 2005 and 2022. To the best of our knowledge, ours is the first study to examine the combined and differential effects of MP and bank competition on the risk-taking behavior of Indian banks. Furthermore, we extend our analysis by re-examining this relationship after the COVID-19 crisis. Based on the panel quantile regression model, our main findings suggest that increased concentration in the Indian banking system weakens the risk-taking channel of MP. Furthermore, the COVID-19 crisis has significantly impacted the relationship between MP, bank competition and bank risk. Finally, we also find that the effect of MP and bank competition on banks’ risk-taking behavior differs between high- and low-risk banks. Our findings are robust to alternative measures of bank risk and MP.