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The Relationship between Competition and Risk Taking Behavior of Indian Banks

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  • Sarkar, Sanjukta
  • Sensarma, Rudra

Abstract

Under the traditional franchise value paradigm, competition in banking markets is considered to be risk enhancing because of its tendency to raise interest rates on deposits. Taking a contrarian view, Boyd and De Nicolo (2005) have argued that competition in the loan market can lead to lower interest rates and hence, reduce bank risk taking. Following these theoretical results, the empirical evidence on the relationship between risk and competition in banking has also been mixed. This paper analyzes the competition-stability relationship for the Indian banking sector for the period 1999-2000 to 2012-2013. Banking competition is measured using structural measures of concentration viz. 5-bank concentration ratios and the Herfindahl-Hirschman Index as well as a non-structural measure of competition- the Panzar-Rosse H-Statistic. Our results show that while concentration leads to lower levels of default, market and asset risks, it exacerbates the levels of capital and liquidity risks. These results have interesting implications for banking sector policy in emerging economies.

Suggested Citation

  • Sarkar, Sanjukta & Sensarma, Rudra, 2016. "The Relationship between Competition and Risk Taking Behavior of Indian Banks," MPRA Paper 81065, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:81065
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    Cited by:

    1. Douglas A. Adu, 2022. "Competition and bank risk-taking in Sub-Saharan Africa countries," SN Business & Economics, Springer, vol. 2(7), pages 1-26, July.
    2. Samangi Bandaranayake & Kuntal K. Das & Robert W. Reed, 2020. "Another Look At ‘Bank Competition And Financial Stability: Much Ado About Nothing’?," Journal of Economic Surveys, Wiley Blackwell, vol. 34(2), pages 344-371, April.
    3. Richard Oduro, 2024. "Impact of recapitalisation and dividend payout policies on financial sustainability of rural and community banks in Ghana," Future Business Journal, Springer, vol. 10(1), pages 1-18, December.
    4. Samangi Bandaranayake & Kuntal K. Das & W. Robert Reed, 2018. "A Replication of “Bank Competition and Financial Stability: Much Ado About Nothing?” (Journal of Economic Surveys, 2016)," Working Papers in Economics 18/18, University of Canterbury, Department of Economics and Finance.
    5. Bijoy Rakshit & Samaresh Bardhan, 2020. "Does Bank Competition Enhance or Hinder Financial Stability? Evidence from Indian Banking," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 75-102.
    6. Khan, Mohammad Azeem & Ahmad, Wasim, 2022. "Fresh evidence on the relationship between market power and default risk of Indian banks," Finance Research Letters, Elsevier, vol. 46(PA).

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    More about this item

    Keywords

    Banks; Competition; Risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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