Is There Any Interactive Effect Between Competition and Risk Networks? Evidence from the Indian Banking System

The study investigates the dynamics of interaction between bank competition and risk networks of the Indian banking system between 2010 to 2020. It has estimated bank competition using the Lerner Index through the translog cost function and bank risk using Z-Score. The study found that bank competition and risk networks are concentrated during the economic upcycle and dispersed during the downcycle. The article also found that big and profitable banks are the least competitive but riskier. The concentrated risk network structures reveal that systemic risk spillover is quite eminent in the Indian banking system. The distance-to-default model, panel vector autoregression (PVAR) model and DCC- MGARCH model confirmed the interaction between competition and risk networks for the Indian banking system. The article observes that bank competition is positively related to the Probability of Default; a positive bi-directional causal relationship exists between the bank competition network index (CNI) and the risk network index (RNI); and finally, long-term persistence of CNI on RNI, supports the competition–fragility theory. The study recommends that regulators strike a balance between competition and stability while designing policy guidelines for the banking system.