The Impact of Competition on the Risk-Taking Behavior: Evidence from Chinese Banking Industry

Abstract

The impact of competition on the risk-taking behavior has been examined extensively by the empirical research. However, most of the studies focused on European banking sector and there is no empirical study testing this issue with regards to Chinese banking industry. The current study contributes to the empirical literature by investigating the impact of competition on credit risk, liquidity risk, capital risk, security risk as well as insolvency risk in Chinese banking sector over the period 2003-2013. Three different bank ownership types are considered which are state-owned commercial banks, joint-stock commercial banks and city commercial banks. The insolvency risk is cross checked by stability inefficiency and Z-score, which is supposed to provide the most accurate results. In order to check the robustness of the results, the competition is measured by Lerner index and cross checked by Panzar-Rosse H statistics. The empirical findings suggest that city commercial banks have the highest credit risk and security risk compared to joint-stock commercial banks and state-owned commercial banks, while the liquidity risk of state-owned commercial banks is the highest. In terms of the capital risk, it is found that city commercial banks is lower than state-owned commercial banks, while the findings suggest that the insolvency risk of state-owned commercial banks is higher than joint-stock commercial banks and city commercial banks. In addition, the results show that higher competition within each bank ownership type leads to higher credit risk, higher liquidity risk, higher capital risk, higher security risk but lower insolvency risk.