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The role of strategic interactions in risk-taking behavior: A study from asset growth perspective

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  • Le, Huong Nguyen Quynh
  • Nguyen, Thai Vu Hong
  • Schinckus, Christophe

Abstract

This study uses panel data on Vietnamese commercial banks from 2008 to 2018 in order to investigate the role of strategic interactions in determining bank risk-taking behavior by considering bank asset growth. The results suggest that aggressive competition is less favorable for banks striving for stability and that a high value of competitive strategy measure (as a proxy for strategic interactions) encourages risk-taking incentives. We also find that the distributional effects of strategic interaction on bank risk-taking because of asset growth reveal that the uncertainty in strategic-interaction-driven profits diminishes in banks with higher growth. This finding is consistent with the idea that when competition becomes more aggressive, bank restructuring should focus on increasing total assets by merging and acquiring small- and medium-sized banks to stabilize the banking sector. Furthermore, the results demonstrate that banks with low leverage or under regulatory pressure engage in more risk-taking. Therefore, policymakers may not implement a tighter capital requirement that contributes to a heightened level of risk. The results are robust to alternative measures of risk-taking and monetary policy stance as well as different econometric specifications.

Suggested Citation

  • Le, Huong Nguyen Quynh & Nguyen, Thai Vu Hong & Schinckus, Christophe, 2022. "The role of strategic interactions in risk-taking behavior: A study from asset growth perspective," International Review of Financial Analysis, Elsevier, vol. 82(C).
  • Handle: RePEc:eee:finana:v:82:y:2022:i:c:s1057521922000953
    DOI: 10.1016/j.irfa.2022.102127
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    More about this item

    Keywords

    Strategic interactions; Bank risk-taking; Asset growth; Competitive strategy measure;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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