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Bank Competition, Concentration and Risk-taking in the UAE Banking Industry

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  • MAGHYEREH, AKTHAM I.

    (Department of Economics and Finance, United Arab Emirates University, Al Ain, UAE)

Abstract

This paper investigates the impact of competition and concentration on bank stability or risk-taking behavior in the UAE banking industry over the period 2006 to 2015. The Herfindahl–Hirschmann (HHI) index is used as an inverse measure of competition, while the nonperforming loans (NPL) ratio and Z-scores are used as proxies for bank risk-taking. The impact of competition is derived from a dynamic panel specification that accounts for bank-level factors (size, efficiency, liquidity, and capitalization). Using the two-step system Generalized Method of Moments (GMM) estimates, our empirical results suggest that the increase in competition erodes banks’ charter value and increases their tendency to assume additional risks with associated negative repercussions on financial stability. These results strongly support the competition-fragility hypothesis for UAE banks. Concorrenza, concentrazione ed assunzione del rischio nel sistema bancario degli Emirati Arabi Uniti Lo scopo di questo studio è analizzare l’impatto della concorrenza e della concentrazione sulla stabilità o sul comportamento risk-taking nel settore bancario degli Emirati Arabi Uniti nel periodo 2006-2015. L’indice Hirschmann-Herfindahl (HHI) è usato come misura inversa di competizione, mentre i prestiti inesigibili e gli indici Z-scores sono utilizzati come indicatori del rischio bancario. L’impatto della competizione deriva da una specificazione panel dinamica che tiene conto dei fattori bancari (dimensioni, efficienza, liquidità, capitalizzazione). Utilizzando le stime a due livelli del Generalized Method of Moments (GMM), i risultati empirici ottenuti suggeriscono che l’aumento della competitività erode l’attivo delle banche ed aumenta la loro tendenza ad assumere ulteriori rischi con conseguenti ripercussioni negative sulla stabilità finanziaria. Questi risultati supportano fortemente l’ipotesi che la competizione vada di pari passo con la fragilità nel sistema bancario degli Emirati Arabi Uniti.

Suggested Citation

  • Maghyereh, Aktham I., 2018. "Bank Competition, Concentration and Risk-taking in the UAE Banking Industry," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 71(2), pages 129-148.
    • Handle: RePEc:ris:ecoint:0824
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    Cited by:

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    2. Karadima, Maria & Louri, Helen, 2020. "Non-performing loans in the euro area: Does bank market power matter?," International Review of Financial Analysis, Elsevier, vol. 72(C).
    3. Harith Yas & Abbas Mardani & Ali Alfarttoosi, 2020. "The Major Issues Facing Staff in Islamic Banking Industry and its Impact on Productivity," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(3), September.

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    More about this item

    Keywords

    Bank Competition; Bank Stability; Herfindahl–Hirschmann Index; UAE Banks;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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