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Beyond Bank Competition and Profitability: Can Moral Hazard Tell Us More?

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  • Chien-Chiang Lee

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  • Meng-Fen Hsieh

Abstract

The purpose of this paper is to investigate the relation between competition, profitability, and risk. The investigation uses bank-level panel data from 171 Chinese banks during 1993 to 2007. Throughout the whole sample, the empirical results divulge that increased bank concentration in China improves the profitability and the risk of its banks. These results support the structure-conduct-performance and the moral hazard hypotheses. In terms of persistence, both the profit and the risk of the banks rise significantly by showing the enhancement of profit and risk from one period to the next. When different types of banks are considered, joint-stock banks have the highest persistence in profit and risk, and therefore more stable profits. City banks support the moral hazard hypothesis. They have entrenched managers that tend to take on more risk when the bank’s charter value falls in a very competitive (less concentrated) environment. Further, deregulation which in 2003 China allowed foreign banks to formally enter China has a negative impact on the structure of China’s banking sector. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Chien-Chiang Lee & Meng-Fen Hsieh, 2013. "Beyond Bank Competition and Profitability: Can Moral Hazard Tell Us More?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 44(1), pages 87-109, August.
  • Handle: RePEc:kap:jfsres:v:44:y:2013:i:1:p:87-109
    DOI: 10.1007/s10693-012-0151-1
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Lee, Chien-Chiang & Yang, Shih-Jui & Chang, Chi-Hung, 2014. "Non-interest income, profitability, and risk in banking industry: A cross-country analysis," The North American Journal of Economics and Finance, Elsevier, vol. 27(C), pages 48-67.
    2. Fungáčová, Zuzana & Pessarossi, Pierre & Weill, Laurent, 2013. "Is bank competition detrimental to efficiency? Evidence from China," China Economic Review, Elsevier, vol. 27(C), pages 121-134.
    3. Tabak, Benjamin M. & Gomes, Guilherme M.R. & da Silva Medeiros, Maurício, 2015. "The impact of market power at bank level in risk-taking: The Brazilian case," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 154-165.
    4. Juha-Pekka Niinimäki, 2014. "Relationship Lending, Bank Competition and Financial Stability," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 8(3), pages 102-124, December.
    5. Chien-Chiang Lee & Chi-Chuan Lee & Chun-Ping Chang, 2015. "Globalization, Economic Growth and Institutional Development in China," Global Economic Review, Taylor & Francis Journals, vol. 44(1), pages 31-63, March.

    More about this item

    Keywords

    Banking competition; Bank profitability; Risk; Structure-conduct-performance; Moral hazard hypothesis; China; G21; C23; O16;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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