The Effect of Market Power on Bank Credit Risk-Taking and Bank Stability in Kazakhstan

Abstract

The purpose of this research is to analyze the effect of banking market power on both the credit risk-taking attitude of Kazakhstani banks and the overall stability of the banking system. This analysis is particularly important for the Kazakhstani financial system as it has been going through the process of consolidation and intensive regulation which has led to a significant decrease in the number of banks. Greater banking market concentration leads to an increase in the market power of some banks and, as a result, potentially limits competition. The sample contains quarterly data for 19 domestic Kazakhstani banks for the period 2007–2011. We employ an instrumental variable technique with a generalized method of moments estimator to overcome the heteroskedasticity and reverse causality issues. Lerner Index is used as a measure of banking market power, credit risk-taking is estimated by the ratio of overdue loans to total bank loans and overall bank stability is measured by the Z-score index. The results indicate that increased market power is negatively associated with credit risk-taking by Kazakhstani banks. At the same time, this increased market power has a significant positive impact on bank stability. These results empirically support the current policy of the Central Bank of Kazakhstan on promoting greater consolidation of small and medium size banks.