Abstract
PurposeThe study examines the dynamic association between competition, risk-taking, performance and income diversification of frontier and emerging economy (FEE) banks. It additionally, explores the effect of banking sector depth and economic performance on the level of competition, performance and risk-taking behavior of banks in these economies.Design/methodology/approachThe paper adopts a panel vector auto-regressive technique and collects data across ninety (90) FEEs.FindingsThe paper finds that competition increases with improvement in the depth of the banking sector, a surge in risk-taking behavior and the adoption of focused strategy by banks. Similarly, income diversification activities are driven by competition, banking sector depth, the state of the economy and bank performance. Additionally, risk-taking behavior, banking sector depth and the state of the economy are relevant in describing bank performance. Also, risk-taking behavior is influenced by bank performance, banking sector depth and economic growth.Originality/valueThe evidence indicates that although competition improves banking sector health, excessive competition and non-competitive banking environment constrain banks’ performance and stability.
Highlights
The study examines the relationship among risk exposure, competition, diversification and the performance of frontier and emerging economies (FEEs) banks
Αk þ βk;jYik;t−j þ εki;t k1⁄41 k1⁄41 k1⁄41 j1⁄41 α 1⁄4 intercept; ε 1⁄4 error term: Y 1⁄4 N 3 T matrix consisting of return on assets (ROA), provision for non-performing loans (PNPLs) or non-performing loans ratio (NPL), top five (5) banks asset concentration (COM) or the HST, growth in banking sector depth (DBAG), growth in gross domestic product (GDPG), growth in average consumer price index (CPIG) and diversification (NII)
Þ εki;t ; α 1⁄4 intercept; ε 1⁄4 errorterm; Y 1⁄4 N 3 T matrix consisting of return on assets (ROA), provision for non-performing loans (PNPL) or non-performing loans ratio (NPL), top five (5) banks asset concentration (COM), growth in banking sector depth (DBAG), growth in gross domestic product (GDPG), growth in average consumer price index (CPIG) and diversification (NII)
Summary
The study examines the relationship among risk exposure, competition, diversification and the performance of frontier and emerging economies (FEEs) banks. An efficient intermediation by banks and enhanced banks performance result in efficient resource allocation to the productive sectors of an economy, productivity improvements and enhancement in social well-being. Banks’ ability to efficiently allocate resources may be influenced by competition, risktaking incentives and income diversification activities. These factors have implications for systemic risk and efficient resource allocation. They impact on the intermediation effectiveness and performance of banks The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode
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