How Does Bank Competition Affect Solvency, Liquidity and Credit Risk? Evidence from the MENA Countries

44 Pages Posted: 27 Nov 2015

See all articles by Raja Almarzoqi

Raja Almarzoqi

International Monetary Fund (IMF)

Sami Ben Naceur

International Monetary Fund (IMF)

Alessandro Scopelliti

KU Leuven, Department Accounting, Finance and Insurance; University of Zurich - Department of Banking and Finance

Date Written: September 2015

Abstract

The paper analyzes the relationship between bank competition and stability, with a specific focus on the Middle East and North Africa. Price competition has a positive effect on bank liquidity, as it induces self-discipline incentives on banks for the choice of bank funding sources and for the holding of liquid assets. On the other hand, price competition may have a potentially negative impact on bank solvency and on the credit quality of the loan portfolio. More competitive banks may be less solvent if the potential increase in the equity base-due to capital adjustments-is not large enough to compensate for the reduction in bank profitability. Also, banks subject to stronger competitive pressures may have a higher rate of nonperforming loans, if the increase in the risk-taking incentives from the lender's side overcomes the decrease in the credit risk from the borrower's side. In both cases, country-specific policies for market entry conditions-and for bank regulation and supervision-may significantly affect the sign and the size of the relationship. The paper suggests policy reforms designed to improve market contestability and to increase the quality and independence of prudential supervision.

Keywords: Bank Competition, Solvency, Bank Regulation, Supervision, bank, risk, banking, credit, Government Policy and Regulation, Corporation and Securities Law, Bank Regulation and Supervision,

JEL Classification: -;- G21, G21, G28, G28, K22, K22, L11, L11

Suggested Citation

Almarzoqi, Raja and Ben Naceur, Sami and Scopelliti, Alessandro, How Does Bank Competition Affect Solvency, Liquidity and Credit Risk? Evidence from the MENA Countries (September 2015). IMF Working Paper No. 15/210, Available at SSRN: https://ssrn.com/abstract=2696068

Raja Almarzoqi (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Sami Ben Naceur

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alessandro Scopelliti

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

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