Does bank competition affect bank risk-taking differently?

Abstract

This paper examines the presence of two competing views—“competition-fragility” and “competition-stability”—in analyzing the impact of competition on bank stability. The approach is to first construct measures of bank competition from a unique dataset of balance sheet and income statements for 542 banks operating in the Philippines from March 2010 to December 2020. The paper then estimates the impact of these competition measures on solvency risk or the risk of being unable to absorb losses with the available capital across universal/commercial banks (U/KBs), thrift banks (TBs) and rural/cooperative banks (R/CBs) industries. Using panel quantile regression, the results reveal that, at the industry level, bank competition reduces solvency risk and that it enhances bank stability. Looking at the risk distribution, the study shows the presence of the competition-fragility and competition-stability hypotheses holding simultaneously for U/KBs suggesting that the effect of competition depends crucially on the underlying individual bank risk. Importantly, the results highlight that the relationship between competition and bank risk is sensitive to other bank-specific characteristics and macro-financial factors related to extent of diversification strategy, cost-to-income ratio, deposit growth, capitalization, changes in the physical banking networks, and growth of real Gross Domestic Product.