Does bank competition matter for performance and risk-taking? empirical evidence from BRICS countries

Abstract

PurposeThis study examines the relationship between banks' competition performance and risk-taking behavior concerning the impacts of bank size and the recent global financial crisis. The analysis empirically uses dynamic panel data from 1137 banks of the BRICS countries (i.e. Brazil Russia India China and South Africa) for the period 2000–2015.Design/methodology/approachDynamic panel generalized method of moments (GMM) has been used primarily to examine the effect of bank competition on performance and risk-taking. Later the paper validates the core results by using three-stage least squares (3SLS) and incorporating alternative measure of competition in baseline equations.FindingsThis study confirms the significant impact of competition that complies with the structure-conduct-performance hypothesis quiet life hypothesis and “competition fragility” view. However, the key robust results are as follows: (1) in competitive markets large banks are more efficient than small banks; (2) there is a nonlinear relationship between competition performance and risk; (3) across bank size competition heterogeneously affects profitability efficiency risk and stability; (4) notably small banks are as efficient as large banks during crisis but shared with risk; and (5) small banks also stable during crisis in highly concentrated markets but less stable in competitive environments.Practical implicationsThis study promotes higher market power for the bank's profitability and financial stability. More intently policymakers should nurture both cost and revenue efficiency for large banks as these are less efficient than small banks in concentrated markets though these banks produce risk. Hence those banks should be cautious to minimize non-performing loans and maximize stability regarding financial and efficiency. Based on the nonlinear pattern of competition the regulators should adopt different policies for short and long run. It also recommends encouraging commercial and cooperative banks in the BRICS region as these are more efficient risk-averse and better stabilized than other types of banks.Originality/valueA good number of studies are available in the current literature which examines the impact of bank competition on either bank performance or risk-taking in a single country or cross country analysis. However, very few studies examine the relationship between bank performance and risk-taking behavior concerning the impacts of competition (non-linear and quadratic) size financial crisis and ownership structure together. Moreover, there is a dearth of literature on this topic that built on BRICS economies.

Competition, capital growth and risk-taking in emerging markets: Policy implications for banking sector stability during COVID-19 pandemic

“…The recent studies on COVID-19 pandemic investigate predominantly the government interventions on stock market return [25][26][27]. The studies that examine the impact of the pandemic on bank performance (more specifically, the financial stability of banks) support the notion that during the financial crisis the responses of capital to risk-taking aptitude of banks is not similar to the normal economic conditions [27,28]. For example [29], finds that higher capital levels promote banks' financial stability by lessening the risk, and higher risk impedes the growth of capital.…”

Impact of Financial Crisis on Credit Risk: Pre- and Post-financial Crises in an Emerging Economy

“…In this study, we try to find out the effect of bank size on credit risk in the context of Bangladesh. Other relevant studies (Moudud-Ul-Huq, 2019b, 2020; Zheng & Moudud-Ul-Huq, 2017) found that bank size is a significant determinant of risk. Another study conducted by Rahman et al (2015) in the context of Bangladeshi banks, found that large banks technically hold a lower amount of regulatory capital which is sometimes below the thresholds and absorb a higher level of risk.…”

“…During 2008, the GFC and economic downturn increased the uncertainty and negatively affected the world economy (Moudud-Ul-Huq, 2020; Moudud-Ul-Huq Zheng, Gupta, Hossain, & Biswas, 2020). Based on the above discussion, we find that credit risk is the main cause of the GFC, which in turn might lead to serious liquidity problems to the firms and hence can go for bankruptcy.…”

“…The previous study uses different proxies for measuring credit risk or lending decision quality of the banks. The studies such as Moudud-Ul-Huq (2018, 2019a, 2019b, 2020), Moudud-Ul-Huq, Zheng, and Gupta (2018), Moudud-Ul-Huq, Ashraf, Gupta, and Zheng (2018), Moudud-Ul-Huq et al (2020) and Zheng and Moudud-Ul-Huq (2017) use the ratio of NPLTL as credit risk indicators. It is considered one of the most critical indicators of credit risk and loan quality of the bank.…”

Effect of Ownership Structure on Bank Diversification and Risk-Taking Behavior in Bangladesh

“…Equity percentage participation by the largest shareholder of the bank. +/- (Anderson & Fraser, 2000;Burkart et al, 1997;Gorton & Rosen, 1995;Iannotta, Nocera, & Sironi, 2007;Martínez & Ramírez, 2011) Bank Size (BS) Log of total assets _ (Bokpin, 2013;Moudud-Ul-Huq, 2020;Srairi, 2013;Su, 2010…”