Market power and bank risks: insights from India and Bangladesh

Abstract

Purpose

This study aims to investigate whether various types of risks faced by the publicly listed commercial banks of India and Bangladesh are driven by market power and provides comparative insights from both economies.

Design/methodology/approach

By using the adjusted Lerner index to gauge bank market power and applying the generalised methods of moments (GMM) regression approach, the research delved into the relationship between bank market power and three distinct facets of risk across a sample of 26 publicly listed commercial banks in India and 22 listed banks in Bangladesh spanning from 2011 to 2022.

Findings

The results indicate that for Bangladesh, both “competition fragility” and “competition stability” viewpoints coexist simultaneously across all risk types, supporting a nonlinear relationship between market power and risk. However, in the Indian context, a nonlinear association exists only in the case of credit risk, while the relationship with insolvency risk is linear, substantiating the “competition fragility view”. Apart from market power and bank-specific variables, GDP growth rate has emerged as a prominent driver across all risk categories in both countries.

Research limitations/implications

The filtration of banks is a limitation that might have influenced the outcomes. This study recommends that the Reserve Bank of India encourages further bank consolidation. Along the same line, Bangladesh Bank should closely oversee the growing competitive landscape. Furthermore, the regulators must monitor the elevated levels of non-performing loans to reduce credit risk so as to bolster the stability of their respective banking sectors.

Originality/value

This comparative study is the first attempt to analyse the market power and risk relationship and includes a novel bank-specific variable, i.e. technology, apart from other established variables.

Citation

Das, S. and Pati, A.P. (2024), "Market power and bank risks: insights from India and Bangladesh", Journal of Financial Regulation and Compliance, Vol. 32 No. 4, pp. 462-478. https://doi.org/10.1108/JFRC-12-2023-0196