Interlinkages of market power, price and liquidity network in banks: evidence from an emerging economy

Abstract

Purpose

The current study aims to analyze the linkage among bank competition, liquidity and loan price in an interconnected bank network system.

Design/methodology/approach

The study employs the Lerner index to estimate bank power; Granger non-causality for estimating competition, liquidity and loan price network structure; principal component for developing competition network index, liquidity network index and price network index; and panel VAR and LASSO-VAR for analyzing the dynamics of interactive network effect. Current work considers 33 Indian banks, and the duration of the study is from 2010 to 2020.

Findings

Network structures are concentrated during the economic upcycle and dispersed during the economic downcycle. A significant interaction among bank competition, liquidity and loan price networks exists in the Indian banking system.

Practical implications

The study meaningfully contributes to the existing literature by adding new insights concerning the interrelationship between bank competition, loan price and bank liquidity networks. While enhancing competition in the banking system, the regulator should also pay attention toward making liquidity provisions. The interactive network framework provides direction to the regulator to formulate appropriate policies for managing competition and liquidity while ensuring the solvency and stability of the banking system.

Originality/value

The study contributes to the limited literature concerning interactive relationship among bank competition, liquidity and loan price in the Indian banks.

Citation

Poddar, A., Choudhary, S., Tiwari, A.K. and Misra, A.K. (2023), "Interlinkages of market power, price and liquidity network in banks: evidence from an emerging economy", Journal of Risk Finance, Vol. 24 No. 3, pp. 285-315. https://doi.org/10.1108/JRF-01-2023-0006