Bank competition, regulatory capital, and risk taking: international evidence

Heba Abou-El-Sood, Rana Shahin

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)1614-1640
Number of pages27
JournalManagerial Finance
Volume49
Issue number10
DOIs
Publication statusPublished - Oct 12 2023

Keywords

  • Africa
  • Bank competition
  • Default
  • Financial stability
  • Regulatory capital adequacy
  • Risk taking

ASJC Scopus subject areas

  • Finance
  • Strategy and Management

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