Munich Personal RePEc Archive

Relationship of financial stability and risk with market structure and competition: evidence from Indian banking sector

Sinha, Pankaj and Sharma, Sakshi (2016): Relationship of financial stability and risk with market structure and competition: evidence from Indian banking sector.

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Abstract

Academic debate over the ‘competition-fragility view’ and ‘competition-stability view’, in context of the risk shift and franchise value paradigms has lead to study the concept and relationship of competition and riskiness of banks in detail. In this respect, Martinez-Miera Repullo 2010 (MMR model) has even propagated the existence of a non-linear relationship between stability and competition. We test these hypotheses on a sample of Indian banks using measures for stability and riskiness of banks. The paper investigates the impact of bank competition and impact of bank concentration on stability, as well as on the riskiness of their loan portfolios .We find evidence for the presence of non-linear relationship between stability index and competition. It may be pointed out that in case of Indian banks, both concentration and competition work simultaneously to support the competition-fragility view. Both increased concentration and decreased competition may lead to greater riskiness with greater instability. The study suggests that it is important to understand the tradeoff between competition and concentration, and their impact on riskiness of loan portfolios and stability of banks for formulating steps to foster competition within the industry.

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