Bank Competition, Crisis and Risk-Taking: Evidence from Emerging Markets in Asia

Posted: 2 Oct 2012

See all articles by Wahyoe Soedarmono

Wahyoe Soedarmono

Sampoerna University - Faculty of Business

Fouad Machrouh

Higher Institute of Commerce and Business Administration

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Multiple version iconThere are 2 versions of this paper

Date Written: October 2, 2012

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

JEL Classification: G21, G28

Suggested Citation

Soedarmono, Wahyoe and Machrouh, Fouad and Tarazi, Amine, Bank Competition, Crisis and Risk-Taking: Evidence from Emerging Markets in Asia (October 2, 2012). Journal of International Financial Markets, Institutions and Money, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2155560

Wahyoe Soedarmono (Contact Author)

Sampoerna University - Faculty of Business ( email )

Jl. Raya Pasar Minggu, Kav. 16
Jakarta, Pancoran 12780
Indonesia

Fouad Machrouh

Higher Institute of Commerce and Business Administration ( email )

casablanca, 22000
Morocco

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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