Heterogeneous risk effects of market power and ownership structure on banking stability and performance

PurposeThis study aims to investigate the effects of revenue competition, ownership structure and diversification on the performance and financial stability in banking. Using a sample of Tunisian listed banks between 2008 and 2023, the authors examine how these factors interact, with a focus on the triple interaction of ownership, competition and diversification and consider the impact of major economic and political events such as the 2008 global financial crisis, the 2011 Revolution, post-2016 banking reforms and the COVID-19 pandemic.Design/methodology/approachUsing quantile regression analysis, the study evaluates the heterogeneous effects of competition, ownership structure and diversification on the performance and stability of both public and private banks. Control variables like size, capitalization, liquidity risk, asset growth, inflation and GDP growth are incorporated to capture internal and macroeconomic influences.FindingsThe findings reveal substantial heterogeneity across the performance distribution. For public banks, market power (Lerner index) enhances profitability at intermediate and upper quantiles (Q25-Q75), while state ownership exerts a consistently negative effect on both return on assets and net interest margin (NIM) across most quantiles, reflecting persistent governance rigidities. Revenue diversification deteriorates profitability among medium- and high-performing public banks (Q50-Q90) and undermines intermediation margins at the upper tail. The triple interaction of public ownership, market power and diversification further depresses NIM at Q50-Q90, pointing to a governance trap in which institutional complexity offsets any strategic gains. For private banks, private ownership strengthens intermediation margins from Q10 to Q75, while the joint effect of diversification and market power amplifies profitability among top performers but reduces it when all three factors, private ownership, market power and diversification, coexist simultaneously (Q50-Q75). External shocks, notably the 2011 Tunisian Revolution and the COVID-19 pandemic, significantly reinforce these distributional divergences.Research limitations/implicationsThis study makes a meaningful contribution to the existing literature by shedding light on the conditional and heterogeneous impact of diversification, competition and ownership structure on bank performance and stability within an emerging market context. Beyond individual factor effects, it offers a nuanced understanding of how the interplay among strategic and structural variables, compounded by external economic and political shocks, collectively shapes banks’ resilience. In doing so, it provides actionable insights and practical guidance for both policymakers and bank managers navigating the distinctive challenges of emerging economies.Originality/valueThe authors’ research work uses an original data set in banking and provides insights into how interactions among strategic and structural factors, combined with macroeconomic shocks, shape the resilience of banks, offering guidance for policymakers and bank managers in emerging economies.