The Relationship between Competition and Risk Taking Behavior of Indian Banks

Sanjukta Sarkar and Rudra Sensarma

MPRA Paper from University Library of Munich, Germany

Abstract: Under the traditional franchise value paradigm, competition in banking markets is considered to be risk enhancing because of its tendency to raise interest rates on deposits. Taking a contrarian view, Boyd and De Nicolo (2005) have argued that competition in the loan market can lead to lower interest rates and hence, reduce bank risk taking. Following these theoretical results, the empirical evidence on the relationship between risk and competition in banking has also been mixed. This paper analyzes the competition-stability relationship for the Indian banking sector for the period 1999-2000 to 2012-2013. Banking competition is measured using structural measures of concentration viz. 5-bank concentration ratios and the Herfindahl-Hirschman Index as well as a non-structural measure of competition- the Panzar-Rosse H-Statistic. Our results show that while concentration leads to lower levels of default, market and asset risks, it exacerbates the levels of capital and liquidity risks. These results have interesting implications for banking sector policy in emerging economies.

Keywords: Banks; Competition; Risk (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-com
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Citations: View citations in EconPapers (5)

Published in Journal of Financial Economic Policy 1.8(2016): pp. 95-119

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Journal Article: The relationship between competition and risk-taking behaviour of Indian banks (2016)
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