The influence of market power on bank risk-taking in the Euro area countries during the inter-crises period

Adriana Novotná and Kristína KoÄ iÅ¡ová

International Journal of Monetary Economics and Finance, 2023, vol. 16, issue 1, 1-22

Abstract: The European debt crisis affected the global economy, and banking stability became fragile. The economy was recovering from a difficult situation, and a new threat in the form of COVID-19 had emerged. Using a sample of 405 banks in 19 Euro area countries between 2010 and 2019, we explore the relationship between market power and bank risk-taking behaviour and verify the presence of competing paradigms. We use panel data analysis considering linear regression models and testing the potential U-shaped curve to analyse banks' market power and risk-taking behaviour. We consider various dimensions of bank risk measures (default risk, leverage risk, operational risk, liquidity risk and interest rate risk), while the market power is expressed through the Lerner index. We also examine the impact of bank-specific and macroeconomic variables on bank stability. The main findings reveal that higher market power decreases banks' risky behaviour, confirming the competition-fragility paradigm.

Keywords: Euro area; banks; stability; risk-taking behaviour; market power; Lerner index; panel data analysis; linear regression model. (search for similar items in EconPapers)
Date: 2023
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