Bank risk-taking behaviour, market power and efficiency: empirical evidence from the East African community
by Moses Nyangu; Nyankomo Marwa; Ashenafi Fanta
International Journal of Banking, Accounting and Finance (IJBAAF), Vol. 13, No. 2, 2022

Abstract: The paper examines the impact of bank risk-taking behaviour and market power on efficiency within the East African community. Comprehensive types of risk-taking behaviour include credit risk, liquidity risk, capital risk and insolvency risk, while structural and non-structural measures of market power are employed. Unlike previous studies, bank efficiency is decomposed into technical, pure technical, scale, cost and revenue efficiency. Using a two-step system GMM on 149 banks with 1,805 observations over the period 2001-2018, the findings reveal that the effect of bank risk-taking behaviour varies depending on the type of efficiency and existing market structure. Market power is observed to precede all types of bank efficiency, thus supporting the concentration-efficiency hypothesis that banks with greater market power are more efficient. Overall, reduced bank risk-taking behaviour and greater market power leads to more bank efficiency. The results present potentially important policy recommendations for bank risks, market power and efficiency.

Online publication date: Thu, 13-Oct-2022

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