رقابت بانک، بحران و ریسک پذیری: شواهد حاصل از بازارهای نوظهور در آسیا

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.

Since the end of the 1980s, financial liberalization aiming to enhance financial sector competition has raised concerns for both researchers and policy makers. In countries with bank-based financial systems, financial liberalization is expected to create more efficient banking markets with lower cost of borrowing for entrepreneurs. Nevertheless, the externalities stemming from an increase in bank competition remain an open question and the occurrence of banking crises in both developing and developed countries over the last three decades has cast doubts on the role of competition in banking. This paper aims to revisit and extend the nexus between bank competition and stability, particularly from the perspective of emerging economies with bank-based financial systems that have experienced financial crises. Indeed, a great number of studies have extensively examined the link between competition and risk in banking, but only few works have been dedicated to emerging economies. Furthermore, to our knowledge no study has investigated the impact of financial crises on the link between competition and stability in banking. The occurrence of financial crises is an important dimension in the competition-stability nexus in banking because crises could directly modify market competitiveness as well as bank behavior in terms of risk taking. Financial crises have also spawned several banking reforms such as capitalizations and consolidations that might in turn alter the degree of competition and moral hazard in banking. Therefore, assessing the link between competition and the risk behavior of banks should take crises into account to control for various factors that might affect the link. For such purposes, this paper focuses on the Asian banking industry for several reasons. First, Asian countries have undergone dramatic changes from expansionary financial liberalization in 1980s to a severe crisis in 1997 and again, have experienced rapid growth of financial globalization in the 21st century (Cook, 2009 and Moshirian, 2008). Second, banking stability remains an important issue in both academic and policy circles in Asia, as banking is the predominant source of finance for private sector businesses in Asian countries (Adams, 2008). Yet, private sector businesses in Asia also remain vulnerable, where poor accounting standards, non-transparent management practices, and a governance system with weak protections for minority shareholders remain in the post-Asian crisis (Park, 2006). This corporate vulnerability can in turn deteriorate bank stability through risk-shifting mechanisms as highlighted by Stiglitz and Weiss (1981). Moreover, the characteristics of competition, crises and reforms in Asian banking are particularly relevant for the purpose of our study. The unsupervised financial liberalization of the 1980s has resulted in stronger competition on the credit market, particularly in real estate markets (Sachs and Woo, 2000). This in turn was perceived as the origin of the 1997 Asian crisis. In response to the 1997 Asian crisis, financial reforms in the form of bank capitalizations and consolidations that might affect bank competition have also been widely implemented.1 With regards to bank consolidations, Asian countries have shown a remarkable trend. They have experienced a rapid growth of bank mergers and acquisitions (M&As) with a growth rate reaching 25% per year as of 2003 (Santoso, 2009). Such consolidations have led to the emergence of large banks and are likely to alter the degree of competition in banking, but whether these developments resulted in higher or lower bank stability remains unexplored, particularly during crisis periods. In the meantime, bank consolidations could exacerbate “too-big-to-fail” effects, increasing risk-taking incentives through “gamble for resurrection” strategies to exploit state bailouts and to transfer losses from shareholders to the taxpayers. Some Asian countries experienced such kinds of bank moral hazard behavior during the 1997 Asian crisis (Cook, 2009). Although bank consolidations exacerbate the “too-big-to-fail” issues in banking, such policies were often followed during crisis periods to restore domestic banks’ financial strength. Furthermore, foreign participation in bank consolidations in the post-1997 Asian crisis was also common in Asia. Williams and Nguyen (2005) point out that the time period following the 1997 Asian crisis was characterized by substantial changes in the Asian banking industry encompassing bank restructuring programs and widened access to foreign ownership. Domanski (2005) further documents that during 2001–2005, Foreign Direct Investment (FDI), particularly cross-border M&As involving banks in Third World countries, increased significantly to US$ 67.5 billion (from only US$ 2.5 billion during 1991–1995). Asia has thus become the second largest recipient of cross-border bank M&A after Latin America and accounts for 36 percent of total bank M&A values. Jeon et al. (2011) further document that the average assets held by foreign banks in Asia and Latin America increased from 26% in 1997 to 38% after five years. In Asia, such an increase is different from one country to another, where South Korea and Indonesia exhibit the largest foreign participation rate. On the whole, our focus on the Asian banking industry enables us to investigate important factors affecting the link between bank competition and stability that have not been considered in the previous literature. Specifically, our main goal is to investigate whether the impact of market power in the banking industry on bank risk taking behavior changes during crisis periods and thus, we provide a benchmark for policy makers in emerging economies regarding banking reforms such as consolidations, foreign participations and bank capitalization. In addition, we also investigate whether bank moral hazard stemming from too-big-to-fail policies, particularly during crisis periods, might alter the nexus between competition and stability in banking. In this paper, we specifically consider the 1994–2009 period and a broad set of commercial banks in Asian countries that have been directly affected by the 1997 Asian financial crisis. These include Indonesia, Malaysia, Thailand, and South Korea that were severely devastated by the banking crisis, as well as China, India, Hong Kong, Pakistan, Philippines, Sri Lanka, and Vietnam that were less affected. Our sample also covers the 2008 global credit crisis triggered in the US. Our results indicate that a higher degree of market power in the banking industry is associated with higher bank capital ratios, higher risk taking, but also higher bank insolvency risk. Hence, 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. Furthermore, our findings also show that during crisis periods, specifically the 1997 Asian financial crisis that has directly affected Asian banks, higher market power has the opposite effect. In other words, lower competition in the banking industry has a destabilizing effect in general but a stabilizing impact during crisis periods. A closer look shows that our findings are conditional to the extent to which countries are locked in more or less important “too-big-to-fail” policies because of the size of their largest banks. The rest of this paper is structured as follows. Section 2 provides a literature review on the relationship between bank market power and bank stability. Section 3 describes the data, variables and provides descriptive statistics. Section 4 highlights the econometric specification and methodology used in this paper. Section 5 discusses our empirical findings, while Section 6 provides a broad set of sensitivity analyses. Section 7 concludes the paper.

In spite of a strong consolidation in Asian banking, there is no evidence that such a process enhances bank stability. This paper attempts to assess such an issue by investigating the impact of market power in banking on bank capital ratios, risk taking, and insolvency risk. Based on a sample of 636 commercial banks in 11 Asian countries over the 1994–2009 period, our empirical results highlight that a higher degree of market power in banking is associated with an increase in bank risk taking and bank insolvency risk although capital ratios are also higher. However, these findings do not hold during the 1997 Asian crisis period (1997–1999), where higher market power decreases bank risk taking and insolvency risk. These results are robust to several sensitivity analyses. Specifically, our findings show that in general, the increase in capital ratios in less competitive environments is not high enough to offset the effect of higher risk taking on bank insolvency risk, highlighting possible moral hazard problems in Asian banks. During a financial crisis, our results for the 1997–1999 period show that lower competition has a stabilizing effect which is opposite to what we find in the overall period of study and in the 2007–2009 period. Under such circumstances, higher market power in the banking industry might contribute to reduce moral hazard, at least in the crisis period that has directly affected Asian banking. A closer investigation is also conducted to examine whether or not such results are country specific. Indeed some Asian countries suffered from relatively more severe bank moral hazard problems in the form of “gambling for resurrection” or “looting”, particularly during the 1997 Asian crisis period. As such, the length of the crisis and the degree of economic recovery differed from one country to another. By incorporating the role of too-big-to-fail subsidies as a country-specific factor, our results are reversed for countries with larger banks which could force central banks to engage in higher amounts of too-big-to-fail subsidies. These findings have various policy implications with regards to bank consolidation policies and the role of the lender of last resort. In the Asian context, market power in the banking industry, which is expected to enhance self-discipline induced by lower competition, does generally neither moderate bank risk taking nor provide enough incentives for banks to hold sufficiently more capital to prevent higher insolvency risk, except when the behavior of the lender of resort in providing too-big-to-fail subsidies is more stringent to limit bank moral hazard incentives. Specifically, our results indicate that during financial crises that directly affect Asian banks, the stabilizing effect of market power is only effective for countries with smaller large banks i.e. when the role of lender of resort is more limited. On the whole in achieving bank stability public authorities need to consider the degree of competitiveness of the banking system but also the size of the largest so-called systemic banks.