Impact of banking sector competition on emerging market banks’ safety and soundness – A study on Indian Banks

Figures & data

Table 1. Accounting Disclosures for Indices

Index	Variables	Abbreviation	Influence	Measure	Explanations
Systemic Risk	Balance Sheet Leverage	BSL	Positive	$\frac{TatalAsset}{TotalEquity}$	The churning of equity in the creation of assets enhances systemic risk in case of significant defaults.
	Risk Leverage	RL	Positive	$\frac{NetWorth}{Risk-WieghtedAssets}$	Leveraging of Networth in the creation of Risk-Weighted Assets would add more risk to the balance sheet.
	Asset Quality	AQ	Positive	GNPA	A higher GNPA ratio decreases banks withstanding capacity to systemic events, thereby increasing systemic risk.
	Income Diversification	ID	Positive	$\frac{InterestIncome}{Non-InterestIncome}$	Systemic risk increases with rise in bank’s interest income over fee-based income.
	Asset Diversification	AD	Positive	$\frac{CorporateLoan}{RetailLoan}$	As corporate loans are much higher compared to retail loans, a default by the corporate can initiate a systemic crisis.
Stability	NPA Provision	NPAP	Positive		With the increase in provisions for NPAs, banks’ asset base becomes weak to resist economic shocks.
	Bank Size	SIZE	Positive	Ln (Total Assets)	Big-sized banks are more stable owing to their large asset base.
	Capital Adequacy	CRAR	Positive	CRAR	Capital adequate banks can withstand macroeconomic downturn, and hence more stable.
	Profitability	PROF	Positive	$\frac{Profit}{TotalAssets}$	Profitable banks are stable due to their higher profit margin.
Competition	Yield on Funds	YOF	Positive	$\frac{Profit}{AvailableFunds}$	A competitive bank would be able to charge more prices for its products.
	Total Revenue	TR	Positive		Higher revenue highlights that banks tend to have a larger market share, and hence more competitive.
	Bank Size	SIZE	Positive	Ln (Total Assets)	Large banks are more competitive due to their large asset base and presence in the market.

Table 2. Hypothesis for Control Variables based on Systemic Risk

Control Variables	Impact on Systemic Risk	Explanation
Bank’s Competition	Negative	Creates competitive pressure in the overall banking system.
Bank’s Stability	Negative	It reduces the default probability d hence reduces systemic risk.
Bank Size (Log of Total Assets)	Positive	Big-sized banks are systemically important banks.
Asset Quality (GNPA)	Positive	GNPA increases the systemic risk.
Risk Leverage (Networth to RWA)	Positive	Leveraging of networth in the creation of risky assets and hence a higher contribution to systemic risk.
Return on Assets	Negative	More profitable banks are less risky nature.
Operating Cost Margin	Positive	Higher operational cost reduces the profit margin and may enhance the systemic risk.
CRAR	Negative	The probability of insolvency decreases with increasing CRAR.
Provision Coverage Ratio	Negative	Higher provision for NPA reduces systemic vulnerability.

Table 3. Hypothesis for Control Variables based on bank’s stability

Control Variables	Impact on Bank’s Stability	Explanation
Bank’s Competition	Negative	Creates competitive pressure in the overall banking system
Systemic Risk	Negative	Stability reduces the probability of default.
Bank Size	Positive	Big-sized banks are more diversified in business, and hence there is a higher contribution to profits and hence stability.
Operating Profit Margin	Positive	Higher operational profits subsequently add to ility.
Balance sheet Leverage	Positive	Leveraging of networth in the creation of more assets and hence a higher contribution to profits.
Return on Assets	Positive	More profitable banks are less risky nature.
Asset Quality (GNPA)	Positive	GNPA increases systemic risk.
Operating Cost Margin	Negative	Higher operational cost reduces the profit margin affecting bank’s stability
Risk-weighted Assets	Positive	The probability of insolvency decreases with increasing CRAR.
Provision Coverage Ratio	Positive	Higher provisions for NPA reduce the probability of default.

Table 4. Hypothesis for Control Variables based on Bank’s Competition

Control Variables	Impact on Bank’s Competition	Explanation
Systemic Risk	Negative	Increases the probability of insolvency and hence negatively impacts the bank’s competition.
Stability	Negative	Bank’s stability creates pressure on the banks to maintain a healthy balance sheet and reduces the overall competition.
Bank Size	Negative	Big-sized banks have more diversified businesses and hence exercises competitive pressure in the banking system.
Return on Assets	Positive	A more profitable banking system magnifies the competitive pressure.
Operating Cost Margin	Positive	Higher operational cost reduces the profit margin and increase the competitive pressure.
Risk-weighted Assets	Negative	More capitalised banks take higher risks and exert higher competitive pressure.
Loan Growth	Positive	Banks with higher loan growth are expected to create more competitive pressure.
Provision Coverage Ratio	Positive	Higher provisions for NPA diminishes default probability and improve the competition in the long-run.

Table 5. Correlation Matrix: Indices Scores

	Systemic Risk	Stability	Competition
Systemic Risk	1
Stability	0.44	1
Competition	0.22	0.93	1

Table 6. Number of Banks: Accounting Disclosures Indices

Indices	Full Sample		Up-cycle		Down-cycle
	Above Average	Below Average	Above Average	Below Average	Above Average	Below Average
Systemic Risk	16	17	11	22	18	15
Stability	17	16	13	20	19	14
Competition	18	15	15	18	19	14

Table 7. Average Indices Scores Across Categories

Categories	Classifications	Competition	Stability	Systemic Risk
Full Sample	All banks	14.94	15.22	12.79
Ownership	Public Banks	15.34	15.94	15.53
	Private Banks	14.32	14.10	8.57
Bank Size	Big Banks	15.81	16.29	12.99
	Small Banks	14.32	14.45	12.69
Economic Cycles	Up-cycle	14.72	15.55	11.69
	Down-cycle	15.05	14.56	13.39

Table 8. Estimation of Cobb-Douglas Production Function

	Coefficient	Std. Error	Z stat	p-value
Constant	0.3546	0.0323	10.98	<0.0001
Ln Working Funds	0.9704	0.0057	170.2	<0.0001
Ln Labour Cost	0.0126	0.0062	2.02	0.0434
Pooled OLS is adequate against fixed effects F(38, 349) = 12.6319, p-value 1.42326e-045
Pooled OLS is adequate against Random effects Breusch-Pagan test statistic: LM = 452.264, ChiSquare(1): 2.319e-100
Random effect is consistent against fixed effects. Hausman test statistic: H = 5.68047, ChiSquare (2): 0.058412

Table 9. Estimated Market Power

Categories	Classifications	Lerner Index	Competition
Full Sample	All banks	0.9839	1.0164
Ownership	Public Banks	0.9824	1.0179
	Private Banks	0.9851	1.0151
Bank Size	Big Banks	0.9849	1.0153
	Small Banks	0.9833	1.0169
Economic Cycles	Up cycle	0.9834	1.0169
	Down cycle	0.9832	1.0171

Table 10. Estimated Bank’s Stability

Categories	Classifications	Z-Score
	All Banks	−0.0806
Ownership	Public Banks	−0.1108
	Private Banks	−0.0353
Economic Cycles	Up-Cycle	0.5526
	Down-cycle	−0.3972
Bank Size	Big Size	−0.1608
	Small Size	0.0076

Table 11. Estimated Systemic Risk

Category	Classification	Systemic Risk
	All banks	0.3407%
Ownership	Private banks	0.3417%
	Public banks	0.3399%
Business Cycle	Up-cycle	0.3354%
	Down-cycle	0.3455%

Figure 1. “U” shaped relationship between bank’s competition and systemic risk.

Table 12. Competition and Systemic risk

Variable	Coefficient	Std. Error	t-ratio	p-value
Constant	−0.0047	0.0003	−13.66	<0.0001
Bank’s Competition	0.0027	0.0008	3.168	0.0036
(Bank’s Competition)^2	0.0039	0.0011	3.517	0.0015

Note: Adjusted R-squared: 0.5547

Durbin-Watson:1.4944

F(2, 387):53.5386, P-value(F): 2.46e-21

H0: Bank’s Systemic Risk and Competition haS ‘U’ shaped relationship

SLM Test: 307.006–265.912$Competitio{n}_{max}\hspace{0.17em}$ ≥ 39.80103307.006–265.912$Competitio{n}_{min}\hspace{0.17em}$ ≥ 30.38702

Table 13. Competition and Bank’s Stability

Variable	Coefficient	Std. Error	t-ratio	p-value
Constant	−82.7555	11.7084	−7.068	<0.0001
Bank’s Competition	307.066	38.1811	8.042	<0.0001
Bank’s Competition^2	−265.912	30.0155	−8.859	<0.0001

Note: Adjusted R-squared: 0.2315

Durbin-Watson: 1.9217

F(2, 387): 59.58376 P-value(F): 2.76e-23

H0: Bank’s Stability and Competition has ‘inverted U’ shaped relationship

Figure 2. Inverted “U” shaped relation between bank’s competition and stability.

Table 14. 2-SLS System Equation for Competition

Variables	Coefficient	Std. Error	t-ratio	p-value
Constant	2.8337	0.1915	14.8	<0.0001
Bank’s Stability	−0.0023	0.0008	−3.018	0.0027
Bank’s Systemic Risk	−58.9651	34.1537	−1.727	0.083
Loan Growth	0.0039	0.0019	1.963	0.0504
Average Price	−0.0066	0.0324	−0.202	0.8401
ROA	6.7721	1.2429	5.448	<0.0001
Operating Cost Margin	5.5184	1.0486	5.263	<0.0001
Bank Size	−0.9797	0.0669	−14.63	<0.0001
CRAR	0.5792	0.2582	2.243	0.0255
Value Creation	−0.1318	0.0411	−3.213	0.0014

Note: Adjusted R-squared: 0.7631

F(9, 380): 150.0549, P-value(F): 2.9e-119

OLS estimates are consistent

Hausman test: $X^2$(2): 16.2813 (p-value: 0.00029)

Sargan over-identification test: All instruments are valid

LM Test: 31.616, $X^2$(1):1.87e-008

Table 15. 2-SLS System Equation for Bank’s Stability

Variables	Coefficient	Std. Error	t-ratio	p-value
Constant	−797.04	340.80	−2.339	0.0199
Bank’s Competition	159.97	68.15	2.347	0.0199
Bank’s Systemic Risk	−23812.00	13530.20	−1.76	0.0792
Balance Sheet Leverage	−317.91	72.42	−4.39	<0.0001
Operating Profit Margin	−1507.30	711.19	−2.119	0.0347
ROA	1958.42	614.56	3.187	0.0016
Bank Size	250.48	116.33	2.153	0.0319
Provision Coverage Ratio	2.74	1.75	1.566	0.1181

Note: Adjusted R-squared: 0.3306

F(7 381): 7.0719, P-value(F): 5.99e-08

Sargan over-identification test: All instruments are valid

LM Test: 0.6272, $x^2$(2):0.7309

OLS estimates are consistent

Hausman test: $x^2$(2): 19.0623 (p-value: 7.25559e-005)

Table 16. 2-SLS System Equation for Systemic Risk

Variables	Coefficient	Std. Error	t-ratio	p-value
Intercept	0.0062	0.0033	1.895	0.0589
Bank’s Competition	−0.0024	0.0009	−2.556	0.0110
Bank’s Stability	−0.0024	0.0008	−3.113	0.0024
ROA	0.0499	0.0169	2.954	0.0033
Asset Quality	0.0004	0.0017	0.204	0.8384
Provision Coverage Ratio	0.0002	3.75E–05	3.731	0.0002
Bank Size	−0.0031	0.0012	−2.683	0.0076
Risk Leverage	−0.0041	0.0017	−2.525	0.0120

Note: Adjusted R-squared: 0.3815

F (7, 381): 9.1815, P-value(F): 1.67e-10

Sargan over-identification test: All instruments are valid

LM Test: 0.468951 $x^2$2(1) :0.790985

OLS estimates are consistent

Hausman test: $x^2$(2): 3.6862 (p-value: 0.158323)