Impact of activity restrictions on risk taking of banks: does competition matter during crisis?
Journal of Financial Regulation and Compliance
ISSN: 1358-1988
Article publication date: 9 July 2020
Issue publication date: 23 January 2021
Abstract
Purpose
This study aims to examine the impact of activity restrictions in shaping the risk-taking behaviour of banks through the channel of competition in different economic conditions.
Design/methodology/approach
The authors use a dynamic panel regression method, particularly a two-step system generalised method of moments to address the risk-taking persistence of banks and endogeneity of activity restrictions and competition with banks’ risk-taking using financial freedom and property rights as instrumental variables. Activity restrictions are computed by constructing an index based on the survey results of Barth et al. (2001, 2006, 2008 and 2013a). Competition is measured by the Panzar–Rosse H-statistic and risk-taking behaviour are measured by non-performing loan ratio and lnZ-score. In the investigation process, the authors control bank characteristics – size, efficiency, ownership and loan composition and macroeconomic factors – gross domestic product growth and inflation, and use 2,527 bank-year observations from 180 commercial banks of Association of the Southeast Asian Nations-five countries over the 1990–2014 period.
Findings
This study finds that activity restrictions exacerbate the risk-taking behaviour of the banks leading to changes in the channel of competition because of the “risk-shifting effect” of competition. The finding is robust by considering the financial crisis and alternative specifications.
Research limitations/implications
This study contributes to bank literature and policy formulation regarding the effect of activity restrictions on the risk-taking behaviour of banks, which is an issue of concern amongst bank regulators, policymakers and academics, especially in the aftermath of the 2008–2009 global financial crisis.
Practical implications
Understanding how the competition plays a role in the relationship between activity restrictions and the risk-taking of banks in different economic situations.
Originality/value
This study provides new insight into the bank literature by investigating the moderating role of competition on activity restrictions and the risk-taking behaviour of banks in a different economic environment.
Keywords
Acknowledgements
This research has been funded by GERAN PEYELIDIKAN FACULTI, University of Malay (Grant # GPF0051-2019). Special thanks to the editor (John Ashton) and two anonymous referees for their constructive comments and suggestions. We believe that the quality of the paper has substantially improved after addressing the comments and suggestions. We would like to thank Jens Hagendorff of Cardiff University, the UK for his valuable comments and suggestions in preparing this manuscript. All remaining errors are our own. The usual caveats apply.
Citation
Noman, A.H.M., Isa, C.R., Mia, M.A. and Sok-Gee, C. (2021), "Impact of activity restrictions on risk taking of banks: does competition matter during crisis?", Journal of Financial Regulation and Compliance, Vol. 29 No. 1, pp. 79-103. https://doi.org/10.1108/JFRC-07-2019-0095
Publisher
:Emerald Publishing Limited
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