Efficiency, foreign banks presence, competition and risk exposure of banks in middle-income economies

The study investigates the dynamic interaction between foreign banks' presence, efficiency, competition, and risk exposure of banks in middle-income economies (MIEs). The study employs data across sixty-two (62) MIEs over the 2000 to 2017 era. It adopts a panel Vector Autoregressive (panel-VAR) approach. The evidence indicates that competition positively influences profit inefficiency and risk exposure but negatively relates to foreign banks' presence and cost inefficiency. Further, more foreign banks' presence increases profit and cost inefficiencies, risk exposure and competition. In contrast, increased profit inefficiency slumps risk exposure and competition amongst banks. Also, a rise in risk exposures surges inefficiencies and decreases competition and foreign banks' presence. We observe both bidirectional and unidirectional causality among some of the variables. The findings imply that MIEs banks' growth coincides with excessive risk exposure and competition. Additionally, foreign banks’ presence promotes the health of the host country's banking sector; however, foreign banks' presence could raise inefficiencies and leads to fierce competition. Therefore, regulators need to strengthen regulatory oversight in periods of increased bank confidence, bank growth, and profit efficiency.