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Bank Competition Using Networks: A Study on an Emerging Economy

Molla Ramizur Rahman () and Arun Kumar Misra ()
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Molla Ramizur Rahman: Vinod Gupta School of Management, Indian Institute of Technology Kharagpur, Kharagpur 721302, West Bengal, India
Arun Kumar Misra: Vinod Gupta School of Management, Indian Institute of Technology Kharagpur, Kharagpur 721302, West Bengal, India

JRFM, 2021, vol. 14, issue 9, 1-18

Abstract: Interconnectedness among banks is a key distinguishing feature of the banking system. It helps mitigate liquidity problems but on the other hand, acts as a curse in propagating systemic risk at times of distress. Thus, as banks cannot function in isolation, this study uses the Contemporary Theory of Networks to examine banking competition in India for five distinct economic phases, emphasizing upon the Global Financial Crisis (GFC) and the ongoing COVID-19 pandemic. This paper proposes a Market Power Network Index (MPNI), which uses network parameters to measure banks’ market power. This network structure shows a formation of bank clusters that are involved in competition. Specifically, network properties, such as centroid, average path length, the distance of a node from the centroid, the total number of connections in the inter-bank market, and network density, do go on to explain banking competition. It is interesting to note that crisis periods witness a lower level of competition, with GFC bearing the least competition. The ongoing COVID-19 pandemic shows a lower trend, but it is of a higher magnitude than GFC. It was also found that big-sized, profitable, capital adequate, and public banks dominate the banking system. Notably, this study was conducted on a sample of 33 listed Indian banks from April 2008 to December 2020.

Keywords: market power; bank competition; networks; market power network index; COVID-19 (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
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