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Do market competition and development indicators matter for banks’ risk, capital, and efficiency relationship?

Changjun Zheng (), Anupam Das Gupta and Syed Moudud-Ul-Huq ()
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Changjun Zheng: School of Management, Huazhong University of Science and Technology, Wuhan, Hubei, P. R. China
Anupam Das Gupta: School of Management, Huazhong University of Science and Technology, Wuhan, Hubei, P. R. China†Department of Finance, University of Chittagong, Bangladesh
Syed Moudud-Ul-Huq: School of Management, Huazhong University of Science and Technology, Wuhan, Hubei, P. R. China

International Journal of Financial Engineering (IJFE), 2017, vol. 04, issue 02n03, 1-27

Abstract: This study investigates the effect of market competition and development indicators on bank risk-taking behavior, capital regulation, and efficiency of banks in Asian emerging economies in light of their recent financial liberalization. Using stochastic frontier analysis (SFA) for measuring cost and profit inefficiency and regressed simultaneous equations by following the approach of generalized methods of the moment (GMM) the study covers a sample of 191 banks for the period between 2000 and 2014 in three Asian emerging economies such as Bangladesh, China, and India. The robust empirical results of GMM panel estimator reveal three core findings: first, intense competition of Asian banks has a positive association with risk-taking but has a negative correlation with regulatory capital and inefficiency. Second, it provides evidence that in economic progression, sample banks having a strong tendency of taking the risk. But no significant relationship found between GDP growth and capital, and GDP growth and inefficiency. This paper thus provides compelling insights to the policy makers and bank managers in setting appropriate strategy for a financial institution in the region.

Keywords: Market competition; development indicators; risk; stochastic frontier analysis; generalized methods of moment (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1142/S242478631750027X

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