Abstract:

This paper addresses the impacts of bank competition on the risk-taking behaviors of banks in Turkey over the period 2002-2012. After estimating H-statistic as a measure of competition and regressing this measure and other explanatory variables on the bank risk indicators, this paper concludes that competition has a negative impact on the financial fragility of Turkish banks, indicating that banks in a more competitive market tend to take lower level of risk. This finding supports the arguments of the “competition-stability” hypothesis in the Turkish banking system. Furthermore, bank concentration is found to be inversely related to bank risk. On the one hand, bank size, lending, liquidity, off-balance sheet activities are essential factors in explaining this relationship. On the other hand, a few instrumental variables are employed to reflect the country’s overall macroeconomic condition.  In general, despite the negative impact of interest rate on bank risk-taking behavior in most of the models, in which different risk measures are used as dependent variables, the result highlights the empirical evidence of no significant association between economic growth and bank risk-taking. Overall, this paper aims to provide policy implications for bank management and consolidation policies and also the role of the Central Bank.

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