Advanced SearchSearch Tips
Relationship between competition in banking industry and bank's risk-seeking tendency
facebook(new window)  Pirnt(new window) E-mail(new window) Excel Download
 Title & Authors
Relationship between competition in banking industry and bank's risk-seeking tendency
Sung, Jimin; Park, Chang Gyun;
  PDF(new window)
This study examined how the level of competition in the banking industry affects the risk-seeking tendency of individual banks. In earlier studies, the NPL ratio was used as an indicator of the risk-seeking tendency, but this ratio has limits because it is an ex post indicator of the risk. Therefore, the asset risk was chosen as a new indicator of the risk-seeking tendency, which is an ex ante measure of the risk, and the data were analyzed. The results suggested that there is a negative correlation between the level of competition of the banking industry and the risk-seeking tendency. Interestingly, opposite results were obtained when the NPL ratio was applied as an indicator of risk-seeking tendency. Therefore, the correlation between the level of competition in the banking industry and the risk-seeking tendency depends on the indicator of the risk-seeking tendency. This means choosing the appropriate indicator is the key component leading to precise results. The asset risk is more consistent with the concept of risk-seeking tendency than the NPL ratio, and it is a more appropriate indicator considering that the asset risk is a relatively less affected indicator other than risk-seeking tendencies.
Bank's risk-taking;Competition in banking industry;Korean banking industry;NPL ratio;Risk weighed asset;
 Cited by
Rhoades, S. A., and R. D. Rutz, "Market power and firm risk. A test of the 'Quiet Life' hypothesis", Journal of Monetary Economics, Vol 9, 73-85, 1982. DOI: crossref(new window)

Keeley, M. C., "Deposit insurance, risk and market power in banking", American Economic Review, 80, 1183-1200, 1990.

Hellmann, T. F., K. C. Murdock and J. E. Stiglitz, "Liberalization, moral hazard in banking, and prudential regulation: Are capital requirements enough?", American Economic Review, 90, No. 1, 147-165, 2000. DOI: crossref(new window)

Konish, M., and Y. Yasuda, "Factors affecting bank risk taking; evidence from Japan", Journal of Baning and Finance, 28, 215-232, 2004. DOI: crossref(new window)

Salsa, V. and J. Saurina, "Deregulation, market power and risk behavior in Spanish banks", European Economic Review, 47, 1061-1075, 2003. DOI: crossref(new window)

Bofondi, M. and Gobbi, G., "Bad loans and entry into local credit markets", Temi di Discussione del Sercizio Studi, 509, 2004.

Jayaratne, J., and P. E. Strahan, "Entry restrictions, industry evolution, and dynamic efficiency: evidence from commercial banking", Journal of Law and Economics, XLI, April, 239-273, 1998. DOI: crossref(new window)

Dick, A., "Nationwide branching and its impact on market structure, quality and bank performance", Journal of Business, 79, 567-592, 2006. DOI: crossref(new window)

Boyd, John H., and David Runkle, "Size and performance of banking firms, Journal of Monetary Economics, 31, 47-67, 1993. DOI: crossref(new window)

De Nicolo, Gianni, "Size, charter value and risk in banking: An international perspective", International Finance Discussion Paper, No. 689, 2000.

Beck, Thorsten, Asli Demirguc-Kunt, and Ross Levine "Bank concentration and crises", Working paper, University of Minnesota, 2003.

Martinez-Miera, D., and R. Repullo, "Does competition reduce the risk of bank failure?", Review of Financial Studies, 23, 3638-3664, 2010. DOI: crossref(new window)

Berger, A.N., Klapper, L.F., R. Turk-Ariss, "Banking structures and financial stability" Journal of Financial Services Research, 35, 99-118, 2009. DOI: crossref(new window)

Gabriel Jimenz, Jose A. Lopez, Jesus Sarurina, "How does competition affect bank risk-taking?", Journal of Financial Stability, 9, 185-195, 2013. DOI: crossref(new window)

Hyun-Wook Kim, "Bank Consolidation and Financial Risk of the Korean Banking Industry", KDI Working paper, 2003.

Jeong and Joh, Relationship between market concetnration in banking industry and bank's risk taking tendency and efficiency, KIF Working paper, 2009.

Jeon and Lim, Bank Competition and Financial Stability : A Comparative Study of Mutual Savings Banks and Commercial Banks in Korea, BOK Working paper, 2013-18, 2013.