Bank Competition, Foreign Bank Entry, and Risk-Taking Behavior: Cross Country Evidence

Sichong Chen, Muhammad Imran Nazir, Shujahat Haider Hashmi and Ruqia Shaikh
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Sichong Chen: School of Finance, Zhongnan University of Economics and Law, Wuhan 430073, China
Muhammad Imran Nazir: School of Finance, Zhongnan University of Economics and Law, Wuhan 430073, China
Shujahat Haider Hashmi: School of Economics, Huazhong University of Science and Technology, Wuhan 430073, China
Ruqia Shaikh: School of Accounting, Zhongnan University of Economics and Law, Wuhan 430073, China

JRFM, 2019, vol. 12, issue 3, 1-26

Abstract: This unique study examines the interactive role of bank competition and foreign bank entry in explaining the risk-taking of banks over the globe. We used cross-country data for the banking sector from 2000 to 2016. Using the pooled regression model and Two-stage Least Squares model (2SLS with Generalized Method of Moments GMM), we document that foreign bank entry decreases the risk-taking behavior of the banks to a certain level and exhibits an inverted U-shaped relation with financial stability. Furthermore, the joint effect of bank competition and foreign bank entry brings financial fragility because host banks tend to make risky investments due to undue competition induced by foreign bank entry. We support the competition–fragility hypothesis when foreign bank entry goes beyond a certain threshold. Our results also suggest that restrictions on bank activities and capital regulation stringency reduce the level of the risk factor. We also applied various robustness tests, which further confirm our mainstream results. Our findings have policy implications for foreign investors and regulatory authorities.

Keywords: foreign bank entry; bank competition; H-statistics; pooled regression; dynamic panel models; risk-taking behavior (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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