Market Power and Risk-Taking of Banks: New Consolidating Evidence from Emerging Economies

38 Pages Posted: 25 Jan 2019

See all articles by Bang Nam Jeon

Bang Nam Jeon

Drexel University - Department of Economics & International Business

Ji Wu

Southwestern University of Finance and Economics (SWUFE) - Research Institute of Economics & Management; Pennsylvania State University Harrisburg

Mengmeng Guo

Southwestern University of Finance and Economics (SWUFE) - Research Institute of Economics & Management

Minghua Chen

Southwestern University of Finance and Economics - Research Institute of Economics and Management

Date Written: November 15, 2018

Abstract

This paper investigates the competition-stability puzzle in the banking market and provides new consolidating evidence at the bank level. Using bank-level data from 35 emerging economies during the period of 2000-2014, we investigate the impact of market power of banks on their risk-taking behavior. We set up a semiparametric model of the market power-bank risk nexus, conduct estimation by applying the Bayesian inference, and provide consistent evidence that there is a significant nonlinear relationship between market power and risk-taking of banks. Bank stability is found to be bolstered with higher market power, but this relationship tends to weaken and even reverse as banks’ market power grows over a threshold level. Our empirical findings support the “competition-fragility” view of the relationship between market power and banks’ risk-taking, until the “competition-stability” view comes into effect when banks’ market power increases to a very high level. We also discuss useful policy implications based on these empirical findings.

Keywords: market power, bank risk-taking, emerging economies

JEL Classification: G21, G15, D53

Suggested Citation

Jeon, Bang Nam and Wu, Ji and Guo, Mengmeng and Chen, Minghua, Market Power and Risk-Taking of Banks: New Consolidating Evidence from Emerging Economies (November 15, 2018). Available at SSRN: https://ssrn.com/abstract=3315616 or http://dx.doi.org/10.2139/ssrn.3315616

Bang Nam Jeon (Contact Author)

Drexel University - Department of Economics & International Business ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

Ji Wu

Southwestern University of Finance and Economics (SWUFE) - Research Institute of Economics & Management ( email )

55 Guanghuacun St
Chengdu, Sichuan 610074
China

Pennsylvania State University Harrisburg ( email )

777 West Harrisburg Pike
Middletown, PA 17057
United States

Mengmeng Guo

Southwestern University of Finance and Economics (SWUFE) - Research Institute of Economics & Management ( email )

55 Guanghuacun Street
Chengdu, Sichuan 610074
China

Minghua Chen

Southwestern University of Finance and Economics - Research Institute of Economics and Management ( email )

Gezhi Building 1201
555 Liutai Revenue, Wenjiang District
Chengdu, Sichuan 610074
China

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