Bank competition, crisis and risk taking: Evidence from emerging markets in Asia

Wahyoe Soedarmono, Fouad Machrouh and Amine Tarazi

Journal of International Financial Markets, Institutions and Money, 2013, vol. 23, issue C, 196-221

Abstract: This paper investigates the impact on financial stability of bank competition in emerging markets by taking into account crisis periods. Based on a broad set of commercial banks in Asia over the 1994–2009 period, the empirical results indicate that a higher degree of market power in the banking market is associated with higher capital ratios, higher income volatility and higher insolvency risk of banks. In general, although banks in less competitive markets hold more capital, the levels of capitalization are not high enough to offset the impact on default risk of higher risk taking. Nevertheless, during crisis periods, specifically the 1997 Asian crisis that has directly affected Asian banks, market power in banking has a stabilizing impact. A closer investigation however shows that such findings only hold for countries with a smaller size of the largest banks, suggesting that the impact of bank competition is conditional on the extent to which the banking industry may benefit from too-big-to-fail subsidies. Overall, this paper has policy implications for bank consolidation policies and the role of the lender of last resort.

Keywords: Bank competition; Moral hazard; Financial crisis; Asia (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (105)

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Related works:
Working Paper: Bank Competition, Crisis and Risk Taking: Evidence from Emerging Markets in Asia (2013)
Working Paper: Bank competition, crisis and risk taking: Evidence from emerging markets in Asia (2013)
Working Paper: Bank Competition, Crisis and Risk-Taking: Evidence from Emerging Markets in Asia (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:23:y:2013:i:c:p:196-221

DOI: 10.1016/j.intfin.2012.09.009

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