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Bank Competition, Crisis and Risk Taking : Evidence from Emerging Markets in Asia

Author

Listed:
  • Wahyoe Soedarmono

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

  • Fouad Machrouh
  • Amine Tarazi

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

Abstract

This paper investigates the impact on financial stability of bank competition in emerging markets by taking into account crisis periods. Based on a broad set of commercial banks in Asia over the 1994-2009 period, the empirical results indicate that a higher degree of market power in the banking market is associated with higher capital ratios, higher income volatility and higher insolvency risk of banks. In general, although banks in less competitive markets hold more capital, the levels of capitalization are not high enough to offset the impact on default risk of higher risk taking. Nevertheless, during crisis periods, specifically the 1997 Asian crisis that has directly affected Asian banks, market power in banking has a stabilizing impact. A closer investigation however shows that such findings only hold for countries with a smaller size of the largest banks, suggesting that the impact of bank competition is conditional on the extent to which the banking industry may benefit from too-big-to-fail subsidies. Overall, this paper has policy implications for bank consolidation policies and the role of the lender of last resort.

Suggested Citation

  • Wahyoe Soedarmono & Fouad Machrouh & Amine Tarazi, 2013. "Bank Competition, Crisis and Risk Taking : Evidence from Emerging Markets in Asia," Post-Print hal-00785653, HAL.
  • Handle: RePEc:hal:journl:hal-00785653
    DOI: 10.1016/j.intfin.2012.09.009
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    More about this item

    Keywords

    Bank competition; Moral hazard; Financial crisis; Asia;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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