Industry concentration and risk taking: Evidence from the South African banking sector.

Abstract

The quest to gain market share within an industry is argued to drive Decision Making Units (DMUs) to accommodate more risk. The cross sectional variations in risk taking is believed to be influenced by the position of the DMU in the industry, with those on the lower end assuming more risk in order to gain market share. On the other hand, less competition among banks could result in higher interest rates being charged on business loans, which might raise the credit risk of borrowers as a result of moral hazard issues. The South African highly concentrated banking sector presents an opportunity to econometrically investigate such issues. Panel estimation techniques are employed on the South African banking sector unique data set. The model explores the relationship between the specified bank risk measure and bank market concentration measure, controlling for individual bank characteristics and the state of the economy. We find that smaller banks in South African concentrated banking sector are more exposed to credit risk than bigger banks. However, considering the interaction between size and concentration measure, bigger banks in highly concentrated industry are more likely to have high credit risk, in line with the concentration fragility hypothesis. Findings have implications for both policy and management of individual banks.

Keywords: Industry concentration; Bank risk-taking; Credit risk; South Africa