Do market competition and development indicators matter for banks’ risk, capital, and efficiency relationship?

Abstract

This study investigates the effect of market competition and development indicators on bank risk-taking behavior, capital regulation, and efficiency of banks in Asian emerging economies in light of their recent financial liberalization. Using stochastic frontier analysis (SFA) for measuring cost and profit inefficiency and regressed simultaneous equations by following the approach of generalized methods of the moment (GMM) the study covers a sample of 191 banks for the period between 2000 and 2014 in three Asian emerging economies such as Bangladesh, China, and India. The robust empirical results of GMM panel estimator reveal three core findings: first, intense competition of Asian banks has a positive association with risk-taking but has a negative correlation with regulatory capital and inefficiency. Second, it provides evidence that in economic progression, sample banks having a strong tendency of taking the risk. But no significant relationship found between GDP growth and capital, and GDP growth and inefficiency. This paper thus provides compelling insights to the policy makers and bank managers in setting appropriate strategy for a financial institution in the region.

Do Human Capital and Cost Efficiency Affect Risk and Capital of Commercial Banks? An Empirical Study of a Developing Country

“…It demonstrates that banks with more risk are more cost inefficient than bank having low risk. This result evidencing the positive association between risk and cost inefficiency of Zheng et al (2017) on Asian Banks. Bad management hypothesis becomes evident in that case.…”

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

“…For robustness purposes, we also apply Non-performing loans to gross loans (NPL/GL) ratio [1]. Regarding capital ratios, we follow [32] and use the ratio of total eligible capital to total assets (EC/TA) as a proxy for a bank's capitalization level; total equity to total assets (TE/TA) ratio is used as an alternative measure of capital [13]. This approach allows us to better distinguish whether a bank's higher capitalization indicates its increased soundness, or whether it is merely a reflection of the higher risk it is facing.…”

“…Therefore, if there is a trade-off between competition and financial stability, then capital tends to have a positive effect on bank stability. If, however, limiting the number of bank charters weakens the banking system, then capital regulations tend to have inverse effect on stability; in other words, stricter capital requirements will tend to increase the probability of bank failure [32].…”

“…Third, previous research finds that more rigorous capital requirements can lead to a higher probability of default of banks. For example [31,32], find that competition decreases the probability of default of a bank loan, but capital regulation increases it. We provide new evidence for emerging markets in the MENA region.…”

Size, efficiency, market power, and economies of scale in the African banking sector

“…Over the decade since the 2008 financial crisis, the literature on banking and finance has seen renewed interest in a number of areas, including the nexus between loan growth, regulation, diversification, and competition, and the development indicators for risk, capital management, and efficiency of banks (Kashif et al 2016;Bokpin 2016;Fanta 2016;Zheng et al 2017;Ozili 2017;Khraisha and Arthur 2018). Interest has also grown regarding banking industry performance in terms of allocation efficiency, risk management and profitability (Moudud-Ul-Huq 2017; Hamdi et al 2018), the application of manifold learning approaches (Huang and Kou 2014;Yan et al 2017), and the implications of Basel III for banking sector development (Ramlall and Mamode 2017).…”