Financial Integration, Competition and Bank Risk-Taking Behavior: Evidence from Africa’s Sub-Regional Markets

Abstract

Financial integration is generally associated with the development of synergies through cross-border banking and investment activities and increased competitiveness among banks. This paper examines the effects of shifts in financial freedom and competition on bank risk-taking behavior using data from 405 banks in 47 African countries across five regional economic communities from 2007-2014. The core findings suggest that financial integration directly increases bank risk-taking behavior in Africa through rising competition. The results also support an inverted U-shaped relationship between competition and bank risk-taking behavior. However, disparities in the results across sub-regional markets suggest that financial integration policies must be tailored to suit the market characteristics of each regional bloc. Overall, the study identifies deficiencies in competitiveness as a fundamental variable that hinders banks’ ability to benefit from the opportunity of stability offered by financial integration in emerging economies.