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Bank Competition and Credit Risk: Does Bank Stability moderate the Competition-Credit Risk nexus?

Author

Listed:
  • Bidush Nepal

    (Rastriya Banijya Bank)

  • Mira Gyawali Nepal

    (Nepal Rastra Bank)

Abstract

This paper intends to understand the impact of bank competition on credit risk and further determine if the association between competition and credit risk depends on bank stability, specifically focusing on commercial banks of Nepal. The study spans from 2011 to 2022 and incorporates various control variables, including macroeconomic, bank-specific, Covid-19 pandemic and regulatory factors. We incorporate a dynamic panel data model and find that while increased competition leads to an increase in credit risks, this effect is reversed in a stable banking environment with strong capitalization, profitability, and steady earnings. Our findings assist policymakers in achieving a more optimal equilibrium between promoting competition and safeguarding financial stability, while also limiting excessive risk-taking. Additionally, it can provide guidance to the bank management in improving their risk management practices.

Suggested Citation

  • Bidush Nepal & Mira Gyawali Nepal, 2025. "Bank Competition and Credit Risk: Does Bank Stability moderate the Competition-Credit Risk nexus?," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 36(1), pages 50-87, August.
    • Handle: RePEc:nrb:journl:v:36:y:2025:i:1:p:50-87
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    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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