The impact of market power of Russian banks on their credit risk tolerance: A panel study

The article presents an empirical analysis of the interaction between market power of Russian banks and their resistance to credit risk during 2004Q1–2011Q2. We employ individual concentration index of banks in different asset markets (structural measure) and the Lerner index (unstructured measure) as indicators of market power. We approximate banks’ credit risks by the share of overdue loans in total loans — an indicator of loan portfolios quality within the Russian Accounting Standards (RAS). The main result implies that increases of market power leads to considerable improvements of the loan portfolio quality of banks, especially large ones, since the intensive development of the credit market allows banks to filter out low-quality borrowers. Moreover, we found empirically the threshold separating the negative and positive effects of competition on credit risk. Since more than 90% of Russian banks are below this threshold in the current macroeconomic environment we reject «competition–stability» hypothesis.