Title: The influence of market power on bank risk-taking in the Euro area countries during the inter-crises period

Authors: Adriana Novotná; Kristína Kočišová

Addresses: Faculty of Economics, Department of Banking and Investments, Technical University of Košice, Němcovej 32, 04001 Košice, Slovak Republic ' Faculty of Economics, Department of Banking and Investments, Technical University of Košice, Němcovej 32, 04001 Košice, Slovak Republic

Abstract: The European debt crisis affected the global economy, and banking stability became fragile. The economy was recovering from a difficult situation, and a new threat in the form of COVID-19 had emerged. Using a sample of 405 banks in 19 Euro area countries between 2010 and 2019, we explore the relationship between market power and bank risk-taking behaviour and verify the presence of competing paradigms. We use panel data analysis considering linear regression models and testing the potential U-shaped curve to analyse banks' market power and risk-taking behaviour. We consider various dimensions of bank risk measures (default risk, leverage risk, operational risk, liquidity risk and interest rate risk), while the market power is expressed through the Lerner index. We also examine the impact of bank-specific and macroeconomic variables on bank stability. The main findings reveal that higher market power decreases banks' risky behaviour, confirming the competition-fragility paradigm.

Keywords: Euro area; banks; stability; risk-taking behaviour; market power; Lerner index; panel data analysis; linear regression model.

DOI: 10.1504/IJMEF.2023.130219

International Journal of Monetary Economics and Finance, 2023 Vol.16 No.1, pp.1 - 22

Received: 29 Nov 2021
Accepted: 06 Mar 2022
Published online: 06 Apr 2023 *