Abstract
Abstract Bank stability is an important aspect of financial stability, especially in bank-centric systems like that of Montenegro. Hence, it is important to analyse risks affecting stability of both the banking and financial system as a whole. Rising competition among banks could pose a challenge and possibly change the level of credit risk, especially if the banks are small in size. This can affect both credit risk and financial stability. Small-sized banks could be the ones to react less nimbly to a changing market structure than bigger banks with stable market shares. This study tries to answer whether competition affects credit risk in Montenegro and whether banks differing in size react differently. Panel data techniques were applied to eleven banks which account for over 90 percent of the banking sector. The results indicate that market concentration could be particularly harmful when it comes to credit risk of small-sized banks, while large-sized banks are less affected. Overall, the increasing competition may positively affect credit risk in Montenegro.
Highlights
Until late 1990s, Montenegro’s banking system existed only in formal terms, considering that it did not perform any of its key tasks of depositing available liquid assets and their allocation
We use the ex-post measure of the credit risk – non- performing loans (NPL) as dependent variable, whereas the independent variables include a set of macroeconomic and bank-specific variables sourced from the Statistical Office of Montenegro (Monstat) and the Central Bank
The risk-shifting effect, rather than margin effect, may be in place in Montenegro. This analysis has shown that increasing market competition in the banking sector could reduce credit risk, as predominantly small-sized banks decrease the share of loans released to risky clients
Summary
Until late 1990s, Montenegro’s banking system existed only in formal terms, considering that it did not perform any of its key tasks of depositing available liquid assets and their allocation. The development of the banking system was extremely fast in the years preceding the outbreak of the global financial crisis when both deposits and loans were recording three-digit growth rates It was a period of fierce competition in which adequate risk management was neglected. Order to ensure market share, i.e. to accept clients with poorer credibility, which increases the share of non-performing loans This means that in a less competitive environment, banks have better profit opportunities and higher franchise value and, they will be less prone to risk taking. A third view has emerged recently that attempts to reconcile these two concepts It is a model developed by Martinez-Miera and Repullo (2010) that starts from Ushaped relations between bank competition and stability. The most important findings are systematized in the concluding remarks
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