Abstract
The main aim of this paper is to investigate the relationship between bank concentration and bank risk in the Jordanian banking industry from 2005 to 2016. While controlling for bank fundamentals and business cycle, we used two measurements to measure bank risk (Z-score and Non-performing loan ratio) and three measurements of bank concentration (Herfindahl–Hirschmann Index, Concentration Ratio and the Lerner Index). We applied the two-step Generalized Method of Moments (GMM) to analysis this relationship between concentration and risk. The empirical evidence shows bank concentration has a positive relationship with risk measured using non-performing loan ratio, and a negative relationship using Z-score. This suggests greater market power leads to greater risks, which in turn supports the concentration-fragility theory.
Highlights
A well-functioning financial system is the key to ensure the smooth flows of funds in an economy, which in turn contributes to the long-term growth and development in the country.1 Past banking crises, such as the European banking crisis in 1992, the Venezuelan banking crisis in 1994, the Asian financial crisis in 1997 and the Ecuador banking crisis in 1998 are among many that show the serious damage and contagion resulting from a banking crisis to an economy and those of neighbouring countries.In addition, the banking crises throughout the world, especially the 2008 financial crisis, showed the importance of bank concentration to the industry
The results obtained in this study show that bank concentration (HHI and concentration ratio) are significantly positive when non-performing loans is employed, and significantly negative when using Z-scores
The results show that the relationship between Hirschmann Index (HHI) and Z-score is significant and negative at the 1% level, suggesting that a decrease in market power will result in more stability
Summary
A well-functioning financial system is the key to ensure the smooth flows of funds in an economy, which in turn contributes to the long-term growth and development in the country. Past banking crises, such as the European banking crisis in 1992, the Venezuelan banking crisis in 1994, the Asian financial crisis in 1997 and the Ecuador banking crisis in 1998 are among many that show the serious damage and contagion resulting from a banking crisis to an economy and those of neighbouring countries.In addition, the banking crises throughout the world, especially the 2008 financial crisis, showed the importance of bank concentration to the industry. A well-functioning financial system is the key to ensure the smooth flows of funds in an economy, which in turn contributes to the long-term growth and development in the country.. A well-functioning financial system is the key to ensure the smooth flows of funds in an economy, which in turn contributes to the long-term growth and development in the country.1 Past banking crises, such as the European banking crisis in 1992, the Venezuelan banking crisis in 1994, the Asian financial crisis in 1997 and the Ecuador banking crisis in 1998 are among many that show the serious damage and contagion resulting from a banking crisis to an economy and those of neighbouring countries. Larger banks that increase their “charter value” encourage their bank managers to make less risky decisions
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