Do Competition, Size, and Macro Variables Impact Bank Risk?

Abstract

The paper investigates the correlation between bank competition, performance, and risk-taking behavior in MENA economies. Furthermore, it explores the risk level associated with dual banking as well as the bidirectional connectedness of competition and jeopardy in terms of size, GDP, and inflation rate. This work employs Generalised Method Moments (GMM) for regression findings and Two-Stage Least Squares (2SLS) for robustness tests. It uses an unbalanced panel dataset from 256 banks and 14 MENA countries from the year 2011 to 2022. According to the study’s findings, financial stability improves, and bank risk-taking decreases with less bank competition. The findings of this investigation corroborate the competition fragility theory. The competition square concept suggests that in a market with competition, risk will eventually rise. In terms of economic progression, risk-taking behavior is exactly the reverse of bank competition. Again, the finding shows that good performance reduces the bank’s risk, finally turning to greater financial stability. Furthermore, there is a substantial association between inflation rates and the extent of banks’ risk-taking activity. In a competitive market scenario, MENA countries inflation rate risk-taking behavior initially increases and then declines over time, while bank size exhibits a similar trend in the near term. When the inflation rate rises, banks’ risk-taking behavior initially decreases and then rises over time. This research will provide policymakers in MENA nations with a better grasp of how to establish strategies that benefit the banking environment.