Risk, competition, efficiency and its interrelationships: evidence from the Chinese banking industry

PurposeThis study investigates the interrelationships between efficiency, competition and risk in the Chinese banking industry.Design/methodology/approachParametric stochastic frontier analysis is used to estimate bank efficiency; the Lerner index is used as the competition indicator; accounting ratios and a translog function are used to measure different types of risk and finally, the three-stage least square estimator is used to investigate the interrelationships.FindingsThe results of this study show that the impact of competition on different types of risk is significant and positive, while there is a significant and positive impact of credit risk, liquidity risk and capital risk on bank competition. In addition, the findings demonstrate that the interrelationships between efficiency and competition are significant and negative. The authors do not find any robust interrelationships between different types of risk and different types of efficiency; the authors find that diversification and higher levels of profitability reduce bank credit risk. The results suggest that a higher developed banking sector reduces the level of bank competition in China.Originality/valueThis is the first piece of research that comprehensively investigates the interrelationships between different types of risk, competition and different efficiencies in China.

Where You Live Matters: Local Bank Competition, Online Marketplace Lending, and Disparity in Borrower Benefits

In the past decade, the proliferation of online marketplace lending has been disrupting the consumer credit market, especially for personal loans for debt consolidation. These lenders, for example, Lending Club, transcend the geographic boundaries within which local banks operate and offer homogeneous access and terms to borrowers. However, the ultimate benefits borrowers derive from marketplace lending can differ significantly because local alternatives may replace marketplace loans when available and favorable. Correspondingly, if local bank competition drives the substitution of an existing marketplace loan with a traditional bank loan, the promise of equal benefits to all borrowers from marketplace lending is unlikely to fully materialize. This competitive dynamic has implications for policy making, particularly in judging the ramifications of bank mergers and acquisitions (M&As). Our results indicate that a borrower who resides in a more competitive market is more likely to pay off a P2P loan early by making a large, one-time payment compared with a borrower from a less competitive market, indicating a substitution with a local bank loan. Thus, borrowers from different markets do not benefit equally from online marketplace lending, disrupting the consumer credit market. In particular, consumers in smaller markets continue to be disadvantaged because of the absence of competitive intensity. This is a consequence of traditional banks competing within their local markets and incentivized to attract marketplace borrowers to traditional loans primarily by their local market conditions. Therefore, unless geographic frictions in traditional lending markets are removed, digital disruptions cannot equalize the benefits to consumers.

Bank Competition–Stability Relations in Pakistan: A Comparison between Islamic and Conventional Banks

This study comparatively analyses the financial stability of Islamic and conventional banks in Pakistan. Using data of 29 conventional and 9 Islamic banks over 18 years, the study first estimates bank competition and stability using Lerner index and Z-Score, respectively. Generalized least squares regression is used and the coefficients are estimated by using random-effects estimator. Results of the mean comparison show that Islamic banks carry more market power (less competition) and are more stable compared to their conventional counterparts. Results of a panel regression show that competition positively affects the stability of the banking sector and this effect is higher for Islamic banks due to their market power. Results also show that bank stability in Pakistan was reduced during global crisis period; however, presence of Islamic banks contributes to the stability even during crisis. Finally, this study supports the competition-stability hypothesis for Islamic banking in Pakistan. Recommendations are given at the end.