Market Power and Risk-Taking of Banks: Some Semiparametric Evidence from Emerging Economies

Abstract

We investigate the impact of market power of banks on their risk-taking, using bank-level data from 35 emerging economies during the period of 2000-2014. We set up a semiparametric model of the market power-bank risk nexus, and conduct estimation applying the Bayesian inference, which provides with consistent evidence that there is a significant nonlinear relationship between market power and risk-taking of banks. Bank stability is found bolstered with higher market power, but this relationship tends to weaken and even reverse as banks’ market power grows further over a threshold level.

Keywords: Market power, bank risk-taking, emerging economies

JEL Classification: G21; G15; D53