Bank competition, regulatory capital, and risk taking: international evidence
ISSN: 0307-4358
Article publication date: 1 May 2023
Issue publication date: 12 October 2023
Abstract
Purpose
Motivated by recent financial liberalization policies in emerging markets, this study investigates whether bank competition and regulatory capital affect bank risk taking in an international banking context.
Design/methodology/approach
Bank competition is regressed, using GLS regression, on various measures of bank risk, to reflect regulatory, accounting and market-based risk-taking. The authors use a sample of publicly traded banks operating in Africa during 2004–2019.
Findings
Results show that higher level of bank competition increases bank risk taking and results in greater financial fragility in the absence of banking capital regulations. Furthermore, larger capital adequacy ratios control the risk-taking incentives of managers and guard banks against the risk of default. Further tests confirm the significance of market-based risk measures over accounting and regulatory measures.
Practical implications
Findings are relevant to bank managers and regulators in their sustained effort of finding an optimal balance between bank competition and financial stability. Increased competition should be balanced with capital regulations to curtail bank excessive risky behavior and derive the social benefits of greater competition in the market while sustaining overall economic growth.
Originality/value
This study provides novel evidence in an international context. First, it uses regulatory, accounting and market-based measures of bank risk taking to reflect regulators', management and market participants' emphasis. Another original contribution is the investigation of bank competition across African economies characterized by financial liberalization, stringent banking system and interesting socio-economic challenges.
Keywords
Acknowledgements
The authors would like to acknowledge valuable remarks by Helmi Sallam, Mohamed Shaker, anonymous reviewers, and the editor.
Citation
Abou-El-Sood, H. and Shahin, R. (2023), "Bank competition, regulatory capital, and risk taking: international evidence", Managerial Finance, Vol. 49 No. 10, pp. 1614-1640. https://doi.org/10.1108/MF-06-2022-0277
Publisher
:Emerald Publishing Limited
Copyright © 2023, Emerald Publishing Limited