Impact of Bank Competition & Concentration On Risk Taking & Stability

North American Journal of Economics and Finance xxx (xxxx) xxx–xxx
Contents lists available at ScienceDirect
North American Journal of Economics

and Finance
journal homepage: www.elsevier.com/locate/najef
The impact of bank competition and concentration on bank risk-

taking behavior and stability: Evidence from GCC countries
Abdulazeez Y.H. Saif-Alyousfia,b, , Asish Sahac, Rohani Md-Rusa
⁎
a
School of Economics, Finance and Banking, Universiti Utara Malaysia, Kedah, Malaysia
b
Department of Finance and Banking, Faculty of Administration Sciences, Taiz University, Taiz, Yemen
c
Department of Finance, FLAME School of Business, FLAME University, Pune, India
ARTICLE INFO ABSTRACT
JEL codes: This paper presents a comprehensive assessment of the impact of competition on bank fragility
C58 pre and post financial crisis period in the GCC banking market as measured by bank risk-taking
E5 behavior and bank stability during the period 1998–2016. Our results indicate that a higher level
G01 of bank competition and the greater degree of concentration adds to financial fragility. The
G18
findings further shows that during the 2008 crisis, lower bank competition maintain the stability
G21
G28
of GCC banks. We also find that lower level of competition and lower concentration in the
banking market increases the risk-taking behavior of the low capitalized, low liquid and small
Keywords:
banks which add to fragility in the banking system. Our findings suggest that countries with
Bank competition and concentration
greater capital stringency, greater supervisory power, greater market discipline, and private
Moral hazard
Bank stability monitoring, with explicit deposit insurance schemes, higher shareholder protection, and higher
Regulation legal efficiency decrease banks’ risk-taking and increase their stability. We also find that greater
Global financial crisis regulatory restrictions and higher creditor protection decrease banks’ stability and increase risk
Bank characteristics in concerned countries. We find support for both competition-fragility and competition-stability
hypotheses in the GCC banking market. The results also confirm that the use of a single measure
of competition is insufficient to assess the role of competition in banking stability.
1. Introduction
The forces of globalization, financial innovation and advances in information technology during the decade of the 1970’s and
1980 s strengthened the wave of deregulation across the financial markets. This, in turn, led banks to pursue aggressive business
strategies to strengthen their bottom-line. It is argued in the literature that the resultant heightened level of risk in the balance sheet
of banks is the main factor behind the global financial crisis in 2008. This prompted regulators to rethink their stance and explore
ways and means to ensure financial stability by striking a balance between apparently conflicting forces of competition and con-
centration in the financial markets. There is, however, an ongoing debate amongst the policy planners, regulators and in the academic
world whether banking competition has positive or negative contribution to stability (Anzoategui, Pería, & Melecky, 2012; Apergis,
2015; Jiménez, Lopez, & Saurina, 2013; Lee, Yang, & Chang, 2014; Martinez-miera and Repullo, 2010; Mirzaei, Liu, & Moore, 2013;
Tan, 2017). As per traditional perception, there exists a trade-off between economic efficiency and stability in the banking system of
any country. It is argued that a competitive banking system is more efficient and hence fosters banking stability. However, it is also
Corresponding author.
⁎
E-mail addresses: azizalyousfi@yahoo.com, abdulazeez@uum.edu.my, abdulazeez_yhsa@taiz.edu.ye (A.Y.H. Saif-Alyousfi),

asish.saha@flame.edu.in (A. Saha), rohani@uum.edu.my (R. Md-Rus).
https://doi.org/10.1016/j.najef.2018.10.015
Received 1 June 2018; Received in revised form 20 October 2018; Accepted 29 October 2018
1062-9408/ © 2018 Elsevier Inc. All rights reserved.
Please cite this article as: Saif-Alyousfi, A.Y.H., North American Journal of Economics and Finance,
https://doi.org/10.1016/j.najef.2018.10.015
A.Y.H. Saif-Alyousfi et al. North American Journal of Economics and Finance xxx (xxxx) xxx–xxx
argued that market power is necessary to ensure stability in the banking system. Whether there exists such a trade-off is therefore
unclear. The structure–conduct–performance hypothesis stresses that banks in the highly concentrated market are less competitive,
which leads to collusive behavior of banks to generate unusual returns. The charter value view of competition proposes that there
could be significant stability costs of competition given the fact that in a highly competitive marketplace which results in pressure on
profit due to the reduction in margin, banks tend to take on excessive risk (Allen and Gale, 2004; Marcus, 1984). This results in
greater fragility (Hellmann, Murdock, & Stiglitz, 2000). It is argued by Keeley (1990) that banks with market power seek higher rents
and as a result, they have higher charter values. He has also argued that the rise in competition results in a decline in charter value
which entices increased risk-taking by banks. The Report on Bank Competition and Financial Stability (OECD, 2011) argues that
competition amongst banks contributes to instabilities and has resulted in banking problems in many countries. On the other hand, it
is also argued in the literature that banking fragility may also be the result of the absence of competition. Boyd and De Nicoló (2005)
argue that banks with more market power are likely to charge higher interest rates to borrowing firms which in turn induce them to
take higher risk resulting in increased fragility of the financial system. Goodhart Charles (2011) argued that the structure of banking
has no relationship with the financial crisis. Anginer, Demirguc-Kunt, and Zhu (2014) argue that faced with the higher level of
competition, banks tend to take diversified risks reducing the financial fragility of the banking system.
In general, most previous studies have been conducted in the context of developed countries and provided support to the com-
petition fragility-hypothesis. It is argued that in less competitive markets increase in competition may foster risk-shifting behavior
and help improve efficiency supporting the competition-stability hypothesis. However, it is not clear whether banks assume a lower
level of risk in a concentrated market or whether there exists opposite association between concentration and competition. GCC,
despite being a key economic block, no comprehensive assessment of the relevance of competition-stability or competition-fragility
hypothesis in the context of the GCC banking sector has so far been reported in the literature. We investigate the GCC countries for
several other reasons as well. First, credit growth in the GCC region has been more moderate, less volatile and less risky. However,
more recently, the GCC countries have experienced rapid and more volatile credit growth rates, which may raise concerns about the
stability of the financial system, and especially the fact that higher credit growth is often followed by the financial crisis (Crowley,
2008). Second, as a bridge between developed and developing countries in Europe, Asia, and Africa, the GCC region attracts investors
and bankers worldwide. This strategic position makes the GCC countries more susceptible to political instability and thus economic
and financial vulnerability. Third, in practice, the last 30 years have seen a significant structural change in the GCC financial markets.
In particular, policies of financial liberalization and financial restructuring were implemented with the goal of enhancing compe-
titiveness in the banking sector. Fourth, though the banking sector of the GCC region is roughly 10% of the US banking sector in terms
of asset size, banks in the GCC countries is relatively young, with the oldest banks dating back to no earlier than the 1950s. Although
the majority is privately owned, the public sector continues to have a prominent role in the banking industry GCC countries. Private
sector ownership of financial institutions also tends to be concentrated in a few shareholders which reduce the threat of corporate
control. The pattern of ownership concentration is, however, not similar across all GCC countries. Government ownership holding is
more prominent in the case of Saudi Arabia, Qatar, and the UAE, but less pronounced for Kuwait, Bahrain, and Oman. The level of
foreign shareholding is a significant factor in the Saudi Arabian banking sector through the legacy of enforced “Saudization” of the
original foreign banks operating in the Kingdom. The level of local shareholding is more significant in Kuwait and Bahrain. Foreign
shareholding in Bahraini institutions mostly reflects inter-GCC ownership. The shareholding structure with significant government
influence/control and individual/family management may result in higher risk-aversion among financial institutions in GCC coun-
tries. Fifth, the global trend towards consolidation has so far by-passed the Gulf. However, with World Trade Organization (WTO)
liberalization planned for the near future, it is quite probable that the current fragmented banking sector will be unable to face the
onslaught when markets do eventually open up and banks start reconsidering their competitive strategies.
It is therefore relevant to assess the competitive structure in the GCC banking sector and to also evaluate the performance of the
commercial banks in the GCC economies. It is also relevant to assess what effect did the recent policy changes of the governments in
the GCC economies have on the risk-taking behavior and stability of banks? Did the global financial crisis affect the performance of
banks in those economies?
As of now, only a few studies have been reported in the literature for the GCC economies (Al-muharrami, Matthews, & Khabari,
2006; Ashraf, Ramady, & Albinali, 2016; Saif-Alyousfi, Saha, & Md-Rus, 2018). Al-muharrami et al. (2006) have used unadjusted
return on assets with the H-statistic proposed by Panzar and Rosse to estimate the monopoly power of GCC banks over the sample
period 1993–2002. Ashraf et al. (2016) examine the relationship between HHI as a measure of ownership concentration and Z-score
as a proxy of the financial stability of financial institutions in GCC countries 2000–2011. In our study, we use data from 1998 to 2016
to cover the period during which the GCC countries have experienced significant changes in competitive conditions because of
mergers and acquisitions, deregulation, international financial integration, and privatization. The economies have also witnessed the
phase of the global financial crisis during the study period. We also aim at assessing the impact of both competition and concentration
on bank risk-taking behavior and bank stability for listed commercial banks in GCC stock markets. We use two structural (HHI and
five larger banks concentration ratio) and two non-structural indices (Boone indicator and Lerner index) to estimate the level of
competition in the respective economies thereby our study does not suffer from the choice of the single measure of competition (Fu,
Lin, & Molyneux, 2014; Khan, Ahmed, & Gee, 2016).
World Bank Data suggests that concentration in the banking sector of GCC economies is very high compared to other Asian
countries and some other developed economies. The average assets of the five larger GCC commercial banks (CR5) account for
92.75% (95.87% for Bahrain, 100% for each Kuwait and Oman, 99.09% for Qatar, and 79.55% and 82.01% for Saudi Arabia and UAE
respectively) of total assets, an increase of 2.48% during the post-financial crisis 2010–2016 compared to the crisis period
2007–2009. In comparison, the said ratio in other Asian countries was 82.39% in China, 39.76% in India, 58.03% in Japan, 78.28%
2
in Malaysia, 68.5% in Thailand and 57.83% in Indonesia. The ratio was 47.42%, 78.28%, and 67.13% in the USA, UK, and Turkey
respectively. The overall NPL ratio, which according to Brownbridge (1998) and Kammer (2013) is an important indicator of the risk-
taking indicator, in the GCC banking sector is high when compared to a group of selected emerging and developed countries as well as
the average NPL ratio of the global banks during the period of 2005–2016. As per the World Bank data, the average NPL ratio to total
loans in the banking sector of UAE and Kuwait (6.01% and 5.8%) was almost double than the average NPL ratio of the global banks
(3.01%). The said ratio was 4.6% in Bahrain and 3.6% in Oman during the same period. However, it may be pointed out here that the
asset classification norm is more conservative in Qatar, and Saudi Arabia, and less so in the UAE, Kuwait, Bahrain and Oman.
In our empirical analysis, we examine the impact of competition on bank risk-taking behavior and financial stability for six GCC
countries over the period 1998–2016. Our paper contributes to the literature in several important ways. First, our study has focused
on analyzing both bank risk-taking behavior and financial stability. We use four proxies of bank risk-taking behavior: standard
deviation of return on assets (SDROA), the standard deviation of return on equity (SDROE), NPL, and loan loss provisions (LLP). In
addition, we use two measures for bank stability: Z-score based on ROA (ZROA) and ROE (ZROE). Second, we also compare the
results that we obtain by using both structural approach (CR5 and HHI) and non-structural approach (Lerner index and Boone
indicator) to bank competition. To the best of our knowledge, until now, only Schaeck and Cihak (2014) and Kasman and Kasman
(2015) have used Boone indicator to investigate the relationship between competition and stability. Third, our study is the first study
that investigates and compares the impact of bank competition on bank risk-taking behavior and financial stability during pre and
post global financial crisis period. Fourth, our study is the first of its kind that analyses and compares the extent of banks' response to
competition based on their characteristics of financial strength such as capitalization, liquidity, and size. Fifth, we also divide the
analysis based on a subsample of banks with different level of capitalization, liquidity, and size before, during and after the global
financial crisis. Sixth, we also replace conventional Lerner index by efficiency-adjusted Lerner index and a quadratic term for the
Lerner index as measures of competition in the banking market. Seventh, we consider two variables for ownership, four variables on
regulations and four environmental (institutional) developments, including the existence of deposit insurance. Finally, the interaction
between market power and regulatory and environmental variables are also included in the model. To address the potential en-
dogeneity problems among risk and competition, we adopt a Generalized Method of Moments (GMM) estimator as in Fu et al. (2014),
Kasman and Kasman (2015) and Khan et al. (2016). We also incorporate a range of robustness tests using various model specifi-
cations.
Overall our results indicate that higher bank competition/lower market power and higher concentration add to financial fragility
(increase the risk and reduce the financial stability of banks). Furthermore, our findings also show that during 2008 global financial
crisis, greater market power/lower competition in the GCC banking market might have contributed to the reduction of moral hazard
and maintaining the stability of banks. We also find that higher market power/lower level of competition and lower concentration in
the banking market increase the bank risk-taking behavior and decrease the stability of low capitalized, low liquid and small banks, in
contrast to the highly capitalized, highly liquid and large banks. Our findings on banks in the GCC banking sector support both the
views of competition-fragility and competition-stability. We find that GCC countries with greater capital stringency, greater super-
visory power, greater market discipline, and private monitoring, with explicit deposit insurance schemes, higher shareholder pro-
tection, and higher legal efficiency decrease banks’ risk-taking and increase their stability. We also find that greater regulatory
restrictions and higher creditor protection decrease banks’ stability and increase risk in the concerned countries. Our results also
confirm that the use of a single measure of competition is insufficient to decipher its role in relation to banking stability.
The remainder of the paper is organized as follows. Section 2 reviews the related literature on the banking risk and competition.
Section 3 describes the research model and the parameters that we use in our analysis. Section 4 illustrates the methodology and the
sample used. Section 5 exhibits our empirical findings, and Section 6 concludes the paper.
2. Related literature
The theoretical and empirical literature on the relationship between bank competition and stability produce contradictory evi-
dence. In this paper, we intend to validate two hypotheses in the context of the GCC banking sector. The first hypothesis suggests that
competition in the banking sector leads to instability. To the contrary, the second hypothesis suggests that there exist a positive
relationship between competition and stability.
The competition-fragility hypothesis, which is also called as franchise value paradigm, was proposed by Marcus (1984) and
Keeley (1990). The main argument in this hypothesis is that higher bank competition increases the risk-taking incentives of banks.
Marcus (1984) indicates that higher competition results in a reduction in franchise value of banks which prompts them to adopt more
risky strategies. Dermine (1984) find that market power has a negative and significant effect on bank credit risk. Using the preference
model, Keeley (1990) find that a decrease in franchise value leads to increased risk-taking by banks. Rhoades and Eutz (1982)
examines the effect of competition, measured by three-bank deposit concentration, on bank risk-taking behavior for the USA banks
and find that increase in bank concentration leads to a decrease in bank-risk-taking behavior (returns volatility). Broecker (1990) also
provides evidence to support the hypothesis of “franchise value” by showing that the association between the market-power of banks
and credit quality is negative and significant. Demsetz, Saidenberg, and Strahan (1996) observe that USA banks with higher market
power have stronger solvency ratio and carry lower risk in their asset book. In a dynamic model of imperfect competition, Matutes
and Vives (1996, 2000) find that higher market power reduces the probability of bank default. In a moral hazard dynamic model,
Hellmann et al. (2000) stress that bank competition has a negative impact on the prudence in risk-taking by banks. In addition, Yeyati
and Micco (2007) in 8 Latin American countries, Nicolò and Loukoianova (2007) in133 non-industrialized economies, Berger,
Klapper, and Turk-Ariss (2009) in 23 developed economies, Uhde and Heimeshoff (2009) in 25 EU countries, and Ariss (2010) in 60
3
developing countries, find support for the traditional view on “competition-fragility”: banks with higher market power are less risky.
In the case of Turkish banks over the period 2002–2012, Kasman and Kasman (2015) use Lerner index and Boone indicator as
measures of the competition and Z-score and NPLs as proxies for bank stability in Turkish banks during 2002–2012. Their results
provide support for the competition-fragility view, where they find that competition is positively associated with Z-score but ne-
gatively associated with the NPL. The findings also suggest that higher concentration has a negative impact on the Z-score but
positive impact on the NPLs.
The competition-stability hypothesis was proposed by Chan and Greenbaum (1986). The authors argue that the quality of
screening loan requests and hence the quality of its loans portfolio depend upon the surplus that results from such a screening process.
They also argue that the said surplus decreases with the increase in the level of competition in the market and results in a decline in
the quality of their loan assets. Mishkin (1999) suggest that banks in a highly concentrated (lower competition) market usually get
public support and guarantees, which may result in increased risk-taking (lower stability) by banks with resultant moral hazard
problem. Caminal and Matutes (2002) argue that in less competitive market banks tend to exercise lower credit rationing and extend
larger loans that precipitate bank failures. In their dynamic model of imperfect competition, Repullo (2004) finds that in markets
with imperfect competition, the intermediation margin of banks would be small which would result in a fall in the franchise value of
banks and prompt them to carry risky activities. Boyd, Nicolò, and Jalal (2006) provide evidence that supports the “competition-
stability” hypothesis. For the US and an international bank sample, they show that a higher degree of bank competition is not
necessarily associated with an increase in the probability of bank failures. Soedarmono, Machrouh, and Tarazi (2011, 2013) find that
the insolvency risk is higher in Asian countries with a higher degree of market power which is related to higher capital ratios, higher
insolvency risk, and higher volatility of bank returns. In addition, Fu et al. (2014) examine the trade-off between financial stability
and competition in 14 Asia Pacific countries from 2003 to 2010. The authors conclude that higher concentration increases financial
fragility and in addition, lower pricing power results in greater exposure to bank risk.
The empirical literature on the relationship between competition and stability has also produced mixed results. In their study of
69 countries over the period 1980–1997, Beck, Demirgu-Kunt, and Levine (2006) find that economies with less market concentration
are less likely to suffer from crises. Schaeck, Cihak, and Wolfe (2009) conclude that if executed properly, policies fostering bank
competition enhances banking stability. Berger et al. (2009) highlight that the “competition-stability” hypothesis and the “franchise
value” hypothesis need not be viewed as opposing propositions. Based on a sample of 8235 banks in 23 developed economies, their
empirical results suggest that a higher degree of bank market power is associated with a decrease in bank insolvency risk and hence,
highlighting the “franchise value” hypothesis. On the other hand, a higher degree of bank market power is associated with an increase
in NPLs, supporting the “competition-stability” hypothesis. The first finding is due to an increase in bank capital ratios when bank
market power increases. Boyd, Nicoló, and Jalal (2009, 2010) find that intensification of competition results in a reduction in
borrower risk and a corresponding rise in the ratio of loan to total asset and a reduction in the probability of bank failure. Zhao, Casu,
and Ferrari (2010) find that deregulation enhances the performance of Indian banks and encourages competition in the lending
market despite stricter prudential norms. Tabak, Gomes, and Medeiros (2015) indicate that higher market power of Brazilian banks is
negatively associated with overall bank risk-taking behavior. The results further suggest that banks with higher levels of capital and
lower market power tend to take higher levels of risk. By using the two-step system GMM estimator, Khan et al. (2016) find that
Lerner index, HHI, and CR5 indicate that lower competition/higher market power decrease the effectiveness of monetary policy
transmission through bank's loan, while the Boone indicator shows the opposite. There is, therefore, conflicting views in the literature
regarding the association between competition, concentration, bank risk-taking behavior, and bank stability. Using a sample of 543
banks operating in 13 Central and East European (CEE) countries over the 1998–2005 period, Agoraki, Delis, and Pasiouras (2011)
find that capital requirements reduce risk in general, but for banks’ with higher market power this effect is significantly weaker or can
be reversed.
In the case of GCC economies over the period 1993–2002, Al-muharrami et al. (2006) find that the banking markets in Saudi
Arabia, Kuwait, and UAE are moderately concentrated, while the banking markets in Bahrain, Qatar, and Oman are highly con-
centrated. Their results suggest that there exist perfect competition in the banking market in Saudi Arabia, Kuwait, and UAE; whereas
there is monopolistic competition in Bahrain, Qatar, and Oman. Using a sample of 125 financial firms from GCC economies over the
period 2000–2011, Ashraf et al. (2016) find that irrespective of the nature of shareholding, greater ownership concentration (HHI) is
positively related to insolvency risk.
3. Data, variables and descriptive statistics
3.1. Data
We collect the data of listed commercial banks in GCC economies for the period 1998 to 2016 which covers the period of the
global financial crisis during 2008–2009 and create the sample of unbalanced panel data from Bankscope Fitch IBCA database. We
follow Maghyereh and Awartani (2014) and Ashraf et al. (2016) and focus only on the listed commercial bank in GCC stock ex-
changes as they face similar regulatory requirements across these economies. The distributions of sample banks across the economies
are UAE (20), Bahrain (13), Saudi Arabia (11), Kuwait (10), Oman (8), and Qatar (8). Moreover, the data available for the selected
banks are adequate to estimate Lerner Index and Boone indicator as measures of bank competition in the GCC banking Sector. Data
for the macroeconomic factors are collected from the World Bank’s World Development Indicators (WDI). Data for ownership
variables and regulatory indices are collected from the World Bank database on “Bank Regulation and Supervision” developed by
Barth, Caprio, and Levine (2001a, 2001b) and updated by Barth, Caprio, and Levine (2006, 2008) and Cihák, Demirgüc-Kunt,
4
Martínez Soledad, and Mohseni-Cheraghlou (2012). Data for the environmental variables are obtained from the World Bank database
developed by La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998) and Demirgüç-kunt, Karacaovali, and Laeven (2005).
3.2. Concentration and competition measures
In this paper we use four proxies to measure competition in the banking market. Two structural ratios used are the concentration
ratio of the top five banks (CR5) and the Herfindahl Hirschman Index (HHI). The two non-structural ratios are the Lerner index and
Boone indicator. Berger et al. (2009) argue that concentration and competition could coexist and can simultaneously induce stability
or fragility. Claessens and Laeven (2004) argue that concentration measures (CR5 and HHI) are not ideal measures of competition
and are challenged by the idea of market contestability. It is argued that the behavior of banks is conditioned by the threat of new
entry and exit. They are forced to behave competitively even in a concentrated market where there is a low barrier for the new
entrants and exit by the inefficient ones. In order to overcome the challenges 3associated with measuring competition in the tra-
ditional approach, the recent research works in the area of bank competition is focused on measuring the market power directly by
assessing the pricing behavior of banks using indices like Panzar-Rosse H-statistic, Lerner index, and Boone indicator.
One can find support for both “competition-stability” and “competition-fragility” in the banking markets in countries like GCC. In
Gulf countries, the level of competition is high and therefore a rise in competition can erode the margin of the banks, increasing the
probability of default (Allen and Gale, 2004). Thus, we expect that higher levels of competition can have positive effects in terms of
risk-shifting behavior. Boyd and Nicoló (2005) suggest that a reduction in lending rates to borrowers reduces the loan’s probability of
default. We feel that initially risk decreases but at some point, higher competition leads to reduction in loan rates and reduces banks’
interest income from non-defaulting a loan which is used as a buffer for loan losses. Hence, the relationship between competition and
concentration with bank risk and stability might be ambiguous.
3.3. Bank competition measures
3.3.1. Lerner index

Our paper uses the Lerner index as a measure of market power or competition. This index has been used by many researchers
including (Agoraki et al., 2011; Ariss, 2010; Chen and Liao, 2011; Fiordelisi and Mare, 2014; Fu et al., 2014; Kasman and Kasman,
2015; Soedarmono, Machrouh, & Tarazi, 2013; Tan, 2016). The Lerner index of banking market may range between ‘less than zero’ to
‘one’: the value of ‘zero’, ‘one’ and ‘less than one’ would imply perfect completion, monopoly, and a non-optimal state (where banks
price their product below their marginal cost) respectively. The Lerner index is calculated as the difference between the price and
marginal costs of total assets of a bank as a percentage of the price of its total assets and can be written as follows:
P-MC
LERNER=
P (1)
where p is the average price of a bank which is calculated as the ratio of total revenue (interest and non-interest income) to total
assets. MC is the marginal cost of total assets that is estimated on the basis of a translog cost function with one output and three input
prices. Following Chen and Liao, (2011), Soedarmono et al. (2013), Fu et al. (2014), Fiordelisi and Mare (2014), and Tan (2016), the
cost function is estimated as follows:
3 3 3 3
1
lnCostit = 0 + 1ln Q it + 2 ln Qit2 + kt ln Wk,it + k ln Qit ln Wk,it + ln Wk,it ln Wj,it + it
2 k=1 k-1 k=1 j=1 (2)
where, COST is total cost of bank (interest expenses plus non-interest expenses) for bank i at time t. Qit represents a proxy for bank
output or total assets. Wk,it represent three input prices. W1,it, W2,it and W3,it indicate the input prices of labor, funds, and fixed
capital, respectively. The input prices are defined as: (W1,it) – personnel costs/total assets; (W2,it) – interest expenses/total deposits;
and (W3,it) – other operating and administrative expenses/total assets.
3
Costit
MC TAit = 1 + 2 ln Qit + ln Wk,it
Qit k=1 (3)
The Lerner index is averaged over time for each bank ‘i’ for inclusion in the regression model. The data for this measure of
competition is at the aggregate level in any country and are estimated country-by-country and year-by-year.
3.3.2. Boone indicator

Boone indicator (Boone, 2008) is used in estimating the level of competition in any market. The main idea of the Boone indicator
is that the more efficient banks improve their market share and their earnings at the expense of less efficient banks. The higher is the
extent of competition in the market, more pronounce would be the effect on the inefficient banks. Following Khan et al. (2016) we
estimate the Boone indicator by using the following model:
ln(Profit)i = + ln(Marginal Costs)i + i (4)
The β indicates the Boone indicator. The more is the negative value of the Boone indicator, higher is the level of competition in
the market because of higher reallocation effect. However, a positive value is feasible and it would mean that the marginal costs of
5
banks are higher and they will earn more profit. A higher positive value would imply that the collusion amongst banks is high or they
are competing on quality.
The Boone indicator overcomes the weakness of concentration measures like CR5 or HHI which aims to assess competitiveness by
investigating levels of concentration in the banking sector: high level of concentration need not necessarily imply lack of competition.
Contrary to market concentration measures, the Boone indicator assesses the interaction between banks by focusing on their be-
havior. On the other hand, the computation of Panzar-Rosse H-statistic to analyze the level of competition in the banking market
requires some restrictive assumption like the presence of long-term equilibrium (Kasman and Kasman, 2015) which cannot be
realized in our study because of the entry and exit from the market (Claessens and Laeven, 2004). It is also a static measure (Tan,
2016). The Boone indicator is innovative in the sense that it not only enables the assessment of competition at the aggregate level but
also at the level of product markets as well as the types of banks like the commercial banks, cooperative banks, and investment banks.
Unlike H-statistics model, the Boone indicator requires relatively small data and it allows estimation of competition on an annual
basis (van Leuvensteijn, Bikker, van Rixtel, & Sørensen, 2011) and at the same time, it has a sound technical basis.
3.3.3. Static measures

3.3.3.1. Herfindhal Hirschman index (HHI). Following Chen and Liao, (2011), Fiordelisi and Mare (2014) and Kasman and Kasman
(2015), we use three alternative measures of HHI: HHI of total assets, HHI of total loans, and HHI of total deposits. We define the HHI
as:
n
HHI= (MSi)2
i=1
where MS i MSi is the market share in terms of total assets, total deposits, or total loans of a bank and n is the number of banks in the
market. The HHI is estimated through the sum of the squared market shares of banks in the relevant market. The lower the number of
banks in the market and the more variance is there in terms of their size, the larger the value of HHI. Al-muharrami et al. (2006) and
Tan (2016) suggest that HHI attaches more importance to the larger banks.
3.3.3.2. Concentration ratio. The concentration ratio shows the degree of competition in the banking sector. Following the study of
Kasman and Kasman (2015) and Khan et al. (2016), we compute the concentration ratio as the ratio of the assets, loans, or deposits of
the five largest banks divided by the total assets, loans, or deposits of the banking sector in each country (CR5).
3.4. Bank risk measures
In this paper, we use two different indicators for ‘risk exposure’ as dependent variables: bank risk-taking and stability. These
variables have been extensively used in banking risk literature (e.g., Agoraki et al., 2011; Soedarmono et al., 2011, 2013; Lee and
Hsieh, 2013; Kasman and Kasman, 2015; Tabak et al., 2015; Ashraf et al., 2016). We consider four dependent variables to measure
‘bank risk-taking’: SDROA, SDROE, NPL and LLP. To measure ‘bank stability’, we use two types of Z-score measures: based on ROA
represented by ZROA, and ROE represented by ZROE.
SDROA, SDROE, ZROA and ZROE are used to compare the results with the findings reported in the literature, while the inclusion
of LLP and NPL as the risk indicators follows the study of Kasman and Kasman (2015) and Tan (2016). A higher Z-score indicates that
there are higher stability and lower risk. However, Fang, Hasan, and Marton (2011) argue that the potential stability of banks cannot
be necessarily reflected the Z-score. Given the economic and regulatory conditions deviation from the bank’s current stability and the
maximum stability must be considered. Thus, we use LLP and NPL as dependent variables to measure the bank risk. Kasman and
Kasman (2015) also argue that credit risk (NPL) is the main source of banking risk; the inability of banks to control the rise in NPL
may result in banking failures. Furthermore, a higher LLP suggests that the bank has a higher risk. Empirical investigations indicate
that an increase in risk exposure leads to increase in the probability of bank defaults. In GCC banking sectors, all the banks are
required to hold more than enough LLP to improve the risk management; the extent of LLP is set at the beginning of the year.
Therefore, the NPL and LLP are important macro-prudential indicators that need to be monitored by the regulators to evaluate the
stability of banking systems. In literature, the NPL and LLP are usually used to measure the loan quality of banks and are used to
measure bank risk-taking behavior as we do in this study.
In line with the authors, in our paper we use three-years rolling time, from t to t-2, to calculate the SDROA. SDROE is also
calculated on the basis of a three-year rolling window. LLP is computed by the ratio of LLP to total loans. The ratio of NPL to gross
loans is used to measure the NPL.
ZROA suggests the number of standard deviations that the ROA of banks have to fall below its forecasted value before its equity is
depleted. Therefore, the higher the value of ZROA the lower is the default probability of banks. For a bank i and time t, ZROA is
computed as follows:
ROAit+ EQTAit
ZROAit=
SDROAit
where ROA is return to total assets, EQTA is equity to total assets.

Similarly, the ZROE is computed as follow:
6
1+ ROEit
ZROE it=
SDROE it
where ROE is return on equity.
3.5. Control variables measures
Following Soedarmono et al. (2011, 2013), Lee and Hsieh (2013), Fu et al. (2014), and Kasman and Kasman (2015), we also
introduce a range of control variables like bank’s size (SIZE), non-interest revenue to total revenue (NIR), cost-income-ratio (COST),
equity to total assets (EQTA), and liquidity risk (LIQ) which are bank-specific factors. SIZE is measured by the logarithm of its total
assets. The NIR is used to measure the diversification of income. We consider also the COST measured by the ratio of operating
expenses to total income, the EQTA is the ratio of equity to total assets, and LIQ is measured by the ratio of loans to total assets. For
country-specific control variables, business cycle conditions are controlled by introducing the annual growth rate of real GDP and the
inflation rate (INF). Apart from the macroeconomic variables, we also use foreign and government ownership as potential de-
terminants of bank competition. Foreign ownership is defined as the percentage of foreign-owned banks in terms of total industry
assets, and public ownership as the percentage of publicly owned banks in terms of total industry assets.
We also include four variables each to capture the effect of regulations and environmental (institutional) developments following
Agoraki et al. (2011) and Lee and Hsieh (2013). The regulatory variables included in our study are Capital requirements index
(CAPRI), Supervisory power index (SPRI), Activity restrictions index (ACTRI), and Market discipline index (MDPI). CAPRI is an index
of capital requirements that account for both initial and overall capital stringency. It is calculated by considering the sources of funds
used as capital and by taking into account various issues that emerge during the calculation of the capital-to-assets ratio. The index
takes values between 0 and 8, with higher values indicating greater capital stringency. SPRI measures the power of supervisory
agencies, indicating the extent to which these authorities can take specific actions against bank management and directors, share-
holders, and bank auditors. This index takes values between 0 and 14 with higher values indicating more SPRI. ACTRI is a proxy for
the level of restrictions on banks’ activities in each country. It is determined by considering whether participation in securities,
insurance, and real estate activities and ownership of non-financial firms are unrestricted, permitted, restricted, or prohibited. ACTRI
takes values between 4 and 16, with higher values indicating higher restrictions. Finally, MDPI is an indicator of market discipline
and shows the degree to which banks are forced to disclose accurate information to the public and whether there are incentives to
increase market discipline. This index ranges between 0 and 8 with higher values indicating greater MDPI.
The four environmental (institutional) developments variables included in our study are Deposit insurance explicit (DEPI),
Shareholder protection (SHPI), Creditor protection (CRPI), and Legal efficiency (LEEI). According to Demirgüç-kunt et al. (2005) and
Lee and Hsieh (2013), under the explicit deposit insurance schemes banks have more incentives for risk-taking. Deposit insurance is a
dummy variable that takes a value of 1 if a country has explicit deposit insurance and a value of 0 otherwise. The last three variables
are proxies for corporate governance. SHPI and CRPI range from 0 to 5, with higher scores for higher protection, while LEEI may take
the multiple values based on the efficacy of the rule of law and the efficiency of the judicial system.
3.6. Descriptive statistics
Table 1 presents the variables used in this study, their definition, and the descriptive statistics for all banks in GCC banking market
while Table 2 presents the statistics for each country. The mean values of competition and concentration measures provide an image
of the structure of banking market in the sample countries. Qatar has a higher concentration of banking market with a mean value of
424.57 and 86.16 for HHI and CR5 respectively. The Boone indicator (−0.01) displays a lower competition level in Qatar. However,
opposite is true with HHI and CR5. The Lerner index (0.47) for Qatar is not the largest in the GCC region, suggesting that large market
concentration does not necessarily be associated with larger market power. Bank concentration in the region is the lowest Saudi
Arabia with mean values of 27.59 and 39.194 for HHI and CR5 respectively. However, the mean value of Lerner index (0.51) for
Saudi Arabia is higher than that in Qatar which supports the view that concentration may not reflect market power. For other GCC
countries, the mean value of HHI for Bahrain, Kuwait, Oman, and the UAE are 190.83, 117.56, 100.71, and 36.48 and the value of
CR5 is 70.48, 64.05, 62.41, and 49.20 for CR5 respectively. The mean values of Lerner index are 0.39, 0.54, 0.41, and 0.46 for these
countries. Saudi Arabia, Kuwait, and UAE have a similar value for the Boone indicator (−0.04), which is the lowest value in the
region, suggesting that competition in these banking markets are higher compared to other GCC countries. However, Bahrain has the
highest mean value of Boone indicator (0.05), that indicating either the competition is least in Bahrain or banks are competing in
terms of their quality in a highly concentrated market in the country. Our findings suggest that it is difficult to arrive at a consistent
interpretation of the extent of competition in the GCC banking markets as the indicators provide different results on a standalone
basis.
In terms of banks’ risk measured by SDROA, SDROE, NPL, and LLP, the table shows that Bahrain commercial banks are riskier as
the SDROA, SDROE, NPL, and LLP are 2.69%, 9.33%, 13.41%, and 1.49% respectively. UAE banks, in comparison, are less risky
(0.51%, 3.12%, 5.87%, and 0.97% respectively) and are more stable in terms of ZROA and ZROE (58.29% and 12.51% respectively)
than other GCC countries. In terms of the size of banks, there is not much of difference across the GCC: it ranged between 14.67 for
Bahrain to 16.70 for Saudi Arabia.
Oman banks have the least income diversification (NIR is the lowest 25.79%), while Bahrain banks are more engaged in non-
traditional activities (NIR is the highest 53.34%). Furthermore, Oman the highest mean value of cost to income ratio or COST
7
Table 1
Variables definition and descriptive statistics
Variable Definition Mean Std. Dev. Min Max Expected sign References Sources
with Z-Score
Bank’s Price Ratio of total revenue to total assets 6.23 3.54 0.42 23.54 Fu et al. (2014), Lee et al. Bankscope
A.Y.H. Saif-Alyousfi et al.
Translog specification (2014), Kasman and Bankscope

Total cost Interest expenses + non-interest expenses (million USD) 86.90 142.23 0.04 761.41 Kasman (2015) and Khan Bankscope
Total assets A mount of total assets (million USD) 1381.95 2523.15 0.13 12311.74 et al. (2016) Bankscope
Price of fund Ratio of interest expenses to total deposits 8.21 14.38 0.27 112.32 Bankscope
Price of labor Ratio of personnel expenses to total assets 1.73 1.25 0.42 7.93 Bankscope
Price of capital Ratio of other non-interest expenses to total assets 1.14 2.93 −4.73 18.73 Bankscope
Measures of competition
Lerner index Calculated on the difference between a bank's price revenue and marginal 0.46 0.09 0.25 0.62 +/− Soedarmono et al. Calculated by authors
costs divided by a bank's price revenue, higher values suggesting less (2013), Fu et al. (2014),
competition in the banking sector. Kasman and Kasman
(2015) and Tan (2016)
Boone indicator The Boone indicator is measured from a profitability model. −0.02 0.04 −0.08 0.16 +/− Fu et al. (2014), Kasman Calculated by authors
ln (Profit )i = + ln (MarginalCosts)i + i , the larger the effect (i.e., the and Kasman (2015) and
larger the β in absolute value), the higher the competition. Khan et al. (2016)
Measures of concentration
HHI (total assets) Sum of the squared each bank's total assets to total assets of banking sector 117.22 355.09 0.00 3508.17 +/− Fu et al. (2014), Lee et al. Calculated by authors
HHI (total deposits) Sum of the squared each bank's total deposits to total deposit of banking 144.85 398.48 0.00 3496.07 +/− (2014), Kasman and Calculated by authors
sector Kasman (2015) and Khan
8
HHI (total loans) Sum of the squared each bank's total loans to total loans of banking sector 174.65 459.19 0.00 3737.88 +/− et al. (2016) Calculated by authors
CR5 (total assets) Calculated by the ratio of the total assets of the five largest banks divided 59.43 16.60 27.04 99.34 +/− Fu et al. (2014), Lee et al. Calculated by authors
by the total assets of all banks operating in the market. (2014), Kasman and
CR5 (total deposits) Calculated by dividing the total deposits of the five largest banks with the 65.72 16.51 33.03 99.86 +/− Kasman (2015) and Khan Calculated by authors
total deposits of all banks operating in the market et al. (2016)
CR5 (total loans) Calculated by dividing the total loans of the five largest banks with the total 73.80 12.19 50.64 99.91 +/− Calculated by authors
loans of all banks operating in the market
Control variables
Bank-specific characteristics
Bank size (SIZE) The natural logarithm of the total assets value 15.66 1.45 10.92 18.81 + Lee and Hsieh (2013) Bankscope
and Lee et al. (2014)
Non-Interest revenue Calculated as non-interest revenue to total revenue 35.08 28.56 −437.93 225.00 − Lee et al. (2014) and Bankscope
(NIR) Chen and Liao (2011)
Cost-income-ratio (COST) Calculated as operating expenses to total income 44.92 43.05 9.77 613.43 − Chen and Liao (2011) Bankscope
Equity to total assets Calculated as equity to total assets 17.08 11.42 −15.69 99.27 + Fu et al. (2014), Kasman Bankscope
(EQTA) and Kasman (2015), and
Lee et al. (2014)
Liquidity (LIQ) Calculated as loans to total assets 54.17 21.59 0.27 95.53 − Kasman and Kasman Bankscope
(2015) and Lee et al.
(2014)
Macroeconomic factors
Real GDP growth (GDP) Annual GDP growth rate 5.34 4.70 −7.07 26.17 + Fu et al. (2014), and WDI
Kasman and Kasman
(2015)
Inflation Rate (INF) Annual inflation rate 3.16 3.40 −4.86 15.05 − Tan (2016) and Chen WDI
and Liao (2011)
(continued on next page)
Table 1 (continued)
with Z-Score
Ownership variables
Foreign ownership % of foreign-owned banks in terms of total industry assets 20.52 27.89 0 87 + Agoraki et al. (2011) Bank Regulation and
(FOREIGN) Supervision Database, World

Bank; Barth et al. (2001a,
2001b, 2006, 2008)
Government ownership % of government owned banks in terms of total industry assets 17.16 16.4 0 46 − Agoraki et al. (2011) Bank Regulation and
(GOVERNMENT) Supervision Database, World
Bank; Barth et al. (2001a,
2001b, 2006, 2008)
Regulatory variables
Capital requirements This variable is determined by adding 1 if the answer is yes to questions 6.66 1.55 3 9 + Agoraki et al. (2011) and Bank Regulation and
index (CAPRI) 1–6 and 0 otherwise, while the opposite occurs in the case of questions 7 Lee and Hsieh (2013) Supervision Database, World
and 8 (i.e. yes = 0, no = ). (1) Is the minimum required capital asset ratio Bank; Barth et al. (2001a,
risk-weighted in line with Basle guidelines? (2) Does the ratio vary with 2001b, 2006, 2008) and Cihák
market risk? (3–5) Before minimum capital adequacy is determined, which et al. (2012)
of the following are deducted from the book value of capital: (a) market
value of loan losses not realized in accounting books? (b) Unrealized losses
in securities portfolios? (c) Unrealized foreign exchange losses? (6) Are the
sources of funds to be used as capital verified by the regulatory/supervisory
authorities? (7) Can the initial or subsequent injections of capital be done
with assets other than cash or government securities? (8) Can initial
9
disbursement of capital be done with borrowed funds?
Supervisory power index This variable is determined by adding 1 if the answer is yes and 0 12.15 1.78 9 14.5 + Agoraki et al. (2011) and Bank Regulation and
(SPRI) otherwise, for each one of the following fourteen questions: (1) does the Lee and Hsieh (2013) Supervision Database, World
supervisory agency have the right to meet with external auditors to discuss Bank; Barth et al. (2001a,
their report without the approval of the bank? (2) Are auditors required by 2001b, 2006, 2008) and Cihák
law to communicate directly to the supervisory agency any presumed et al. (2012)
involvement of bank directors or senior managers in illicit activities, fraud,
or insider abuse? (3) Can supervisors take legal action against external
auditors for negligence? (4) Can the supervisory authorities force a bank to
change its internal organizational structure? (5) Are off-balance sheet items
disclosed to supervisors? (6) Can the supervisory agency order the bank’s
directors or management to constitute provisions to cover actual or
potential losses? (7) Can the supervisory agency suspend director’s decision
to distribute dividends? (8) Can the supervisory agency suspend director’s
decision to distribute bonuses? (9) Can the supervisory agency suspend
director’s decision to distribute management fees? (10) Can the supervisory
agency supersede bank shareholder rights and declare bank insolvent? (11)
Does banking law allow supervisory agency or any other government
agency (other than court) to suspend some or all ownership rights of a
problem bank? (12) Regarding bank restructuring and reorganization, can
the supervisory agency or any other government agency (other than court)
supersede shareholder rights? (13) Regarding bank restructuring &
reorganization, can supervisory agency or any other government agency
(other than court) remove and replace management? (14) Regarding bank
restructuring & reorganization, can supervisory agency or any other
government agency (other than court) remove and replace directors?
Table 1 (continued)
with Z-Score
Activity restrictions index The score for this variable is determined on the basis of the level of 9.98 2.11 6 13 + Agoraki et al. (2011) and Bank Regulation and
(ACTRI) regulatory restrictiveness for bank participation in: (1) securities activities Lee and Hsieh (2013) Supervision Database, World
(2) insurance activities (3) real estate activities (4) bank ownership of non- Bank; Barth et al. (2001a,
financial firms. These activities can be unrestricted, permitted; restricted or 2001b, 2006, 2008) and Cihák
prohibited that are assigned the values of 1–4, respectively. We use an et al. (2012)
overall index by calculating the average value over the four categories.
Market discipline index This variable is determined by adding 1 if the answer is yes to questions 3.01 0.98 1.83 4.5 + Agoraki et al. (2011) and Bank Regulation and
(MDPI) 1–7 and 0 otherwise, while the opposite occurs in the case of questions 8 Lee and Hsieh (2013) Supervision Database, World
and 9 (i.e. yes = 0, no = 1). (1) Is subordinated debt allowable (or Bank; Barth et al. (2001a,
required) as part of capital? (2) Are financial institutions required to 2001b, 2006, 2008) and Cihák
produce consolidated accounts covering all bank and any non-bank et al. (2012)
financial subsidiaries? (3) Are off-balance sheet items disclosed to public?
(4) Must banks disclose their risk management procedures to public? (5)
Are directors legally liable for erroneous/misleading information? (6) Do
regulations require credit ratings for commercial banks? (7) Is an external
audit by certified/licensed auditor a compulsory obligation for banks? (8)
Does accrued, though unpaid interest/principal enter the income statement
while loan is non-performing? (9) Is there an explicit deposit insurance
protection system?
Environmental (Institutional development) variables
Deposit insurance (DEPI) Deposit insurance explicit = 1; otherwise 0. 0.3 0.46 0 1 + Lee and Hsieh (2013) Demirgüç-kunt et al. (2005)
Shareholder protection Shareholder protection; index scales range from 0 to 5, with higher scores 2.63 0.34 1.91 3.02 + Lee andHsieh (2013) La Porta et al. (1998)
10
(SHPI) for higher protection
Creditor protection (CRPI) Creditor protection; index scales range from 0 to 5, with higher scores for 3.94 0.39 3 5 + Lee and Hsieh (2013) La Porta et al. (1998)
higher protection
Legal efficiency (LEEI) Legal efficiency is the multiple values for the rule of law and the efficiency 44.43 4.97 40 50 - Lee and Hsieh (2013) La Porta et al. (1998)
of the judicial system, with higher scores for higher legal efficiency.
Dependent Variables (Bank risk and stability)

SDROA Standard deviation of ROA from a three-period rolling window 0.99 2.80 0.00 32.62 Bankscope
SDROE Standard deviation of ROE from a three-period rolling window 6.86 32.71 0.01 561.54 Bankscope
NPL Calculated as loan loss provision to total loans 6.55 10.84 0.04 99.51 Bankscope
LLP Calculated as non-performing loans to total loans 0.97 3.82 −56.60 58.50 Bankscope
ZROA Z-score based on ROA from a three-period rolling window 53.08 66.96 −1.81 338.24 Bankscope
ZROE Z-score based on ROE from a three-period rolling window 10.24 19.96 −3.14 204.74 Bankscope
Note: Table shows the variables used in this study along with their definition and descriptive statistics for a full sample of GCC banking market. Data is winsorized at 1% and 99% percentiles to control for
outlier.
(65.72%), while it is the lowest for Qatar (31.58). Bank capitalization ranges between 13.89% for Qatar to 20.87% for Bahrain. Oman
banks are less liquid with the highest mean value of 67.84% for LIQ while banks in Bahrain are more liquid with the lowest mean
value of LIQ of 34.75%. The overall economic outlook does not vary much across the countries, with GDP growth ranging from 3.50%
for Oman to 11.17% for Qatar and inflation ranging from 1.75% for Bahrain to 4.08% for UAE.
Table 3 displays the correlation coefficients between the parameters in this study. As shown in Table 3, the correlation between
the independent variables is < 0.90, suggesting the absence of the problem of multicollinearity.
Table 2
Country-wise descriptive statistics
Variable Bahrain Kuwait Oman
Mean Std. Dev. Min Max Mean Std. Dev. Min Max Mean Std. Dev. Min Max
SDROA 2.69 5.57 0.00 32.62 0.65 0.91 0.00 5.69 1.03 3.24 0.04 24.39
SDROE 9.33 15.49 0.17 85.78 6.28 81.44 0.01 561.54 4.49 6.17 0.07 35.86
NPL 13.41 20.99 0.64 99.51 5.31 4.88 0.04 30.33 6.16 7.15 0.12 39.48
LLP 1.49 8.53 −56.60 58.50 1.21 1.28 −0.37 8.77 0.63 1.32 −1.45 10.23
ZROA 42.94 64.46 −3.07 338.24 7.67 29.67 −1.14 336.66 8.60 34.14 0 305.62
ZROE 5.45 8.41 −3.14 49.30 1.83 10.50 −2.88 195.39 1.44 9.44 −2.84 194.45
Lerner index 0.39 0.07 0.25 0.49 0.54 0.06 0.41 0.62 0.41 0.04 0.31 0.44
Boone indicator 0.05 0.04 −0.01 0.16 −0.04 0.02 −0.08 −0.02 −0.02 0.02 −0.03 0.04
HHI 190.83 305.20 0.11 1239.97 117.56 170.14 0.03 1023.08 100.71 289.12 0.01 2056.11
CR5 70.48 10.17 47.88 88.53 64.05 6.62 55.76 80.66 62.41 2.87 57.64 66.22
SIZE 14.67 1.63 10.92 17.34 16.07 1.09 12.99 18.17 14.77 1.21 11.17 17.30
NIR 53.34 56.53 −437.93 225.00 30.37 15.84 −59.73 66.66 25.79 11.62 4.17 99.72
COST 63.75 64.45 20.62 613.43 38.24 21.46 12.20 191.07 65.72 87.22 23.75 574.95
EQTA 20.87 15.49 −15.69 91.46 13.89 7.20 0.77 79.93 19.48 19.62 7.45 99.27
LIQ 34.75 21.84 0.27 72.54 54.46 18.98 4.51 95.53 67.84 16.78 3.97 85.79
GDP 4.88 1.78 2.10 8.29 4.38 5.82 −7.08 17.32 3.50 2.97 −2.67 8.20
INF 1.75 1.51 −1.21 3.53 3.48 2.33 0.89 10.58 2.41 3.16 −1.20 12.09
FOREIGN 71.70 21.84 28.04 87 0 0 0 0 21.93 9.19 11.1 30
GOVERNMENT 1.26 1.25 0 3.7 6.75 5.97 0 12 5.63 4.98 0 10
CAPRI 6.31 1.76 3 8 7.69 1.11 6 9 6.63 0.93 6 8
SPRI 12.81 1.43 11 14.5 10.50 0.50 10 11 13.13 0.90 12 14.5
ACTRI 8.88 1.32 7 10 8.00 1.81 6 10 11.94 0.66 11 13
MDPI 3.56 0.27 3.17 3.83 3.43 1.12 1.83 4.5 2.84 0.59 2.00 3.58
DEPI 1 0 1 1 0 0 0 0 1 0 1 1
SHPI 2.5 0 2.5 2.5 2.75 0 2.75 2.75 2.35 0 2.35 2.35
CRPI 4 0 4 4 4 0 4 4 4 0 4 4
LEEI 40 0 40 40 40 0 40 40 40 0 40 40
N 208 160 128
Variable Qatar Saudi Arabia UAE
SDROA 0.49 0.59 0.00 3.44 0.57 0.84 0.01 6.12 0.51 0.60 0.01 4.10
SDROE 4.02 6.76 0.11 42.16 3.48 3.37 0.02 21.47 3.12 3.40 0.07 19.24
NPL 4.63 8.40 0.05 47.54 2.93 3.63 0.04 27.46 5.87 5.03 0.16 26.58
LLP 0.54 1.06 −0.95 8.20 0.67 0.60 −0.29 3.00 0.97 0.91 −0.62 6.83
ZROA 12.77 41.87 0 335.78 21.72 51.86 0 343.40 58.29 66.56 0 325.97
ZROE 2.74 12.03 −1.40 175.77 3.76 10.73 −1.10 104.75 12.51 22.51 −1.37 204.74
Lerner index 0.47 0.10 0.25 0.60 0.51 0.08 0.31 0.59 0.46 0.08 0.30 0.59
Boone indicator −0.01 0.02 −0.03 0.08 −0.04 0.01 −0.07 −0.02 −0.04 0.01 −0.05 −0.02
HHI 424.57 852.38 4.59 3508.17 27.59 34.27 0.30 211.48 36.48 67.52 0.08 330.39
CR5 86.13 12.00 65.38 99.34 39.19 11.22 27.04 65.03 49.20 6.06 42.36 59.00
SIZE 15.98 1.21 13.27 18.81 16.70 0.89 14.13 18.25 15.70 1.33 13.03 18.52
NIR 30.59 12.69 6.53 73.34 32.07 12.49 0.89 100.00 32.20 12.66 −20.96 77.53
COST 31.58 11.80 11.91 80.34 40.24 17.06 17.74 160.00 37.11 14.62 9.77 155.65
EQTA 16.00 6.37 7.01 50.62 15.17 10.80 7.85 98.93 16.83 6.32 6.34 52.03
LIQ 52.69 20.13 5.11 84.33 52.64 17.58 4.26 87.90 63.03 17.54 2.12 94.32
GDP 11.17 6.97 3.72 26.17 5.07 2.88 0.13 9.96 4.66 3.89 −5.24 10.85
INF 4.04 5.47 −4.86 15.05 2.70 2.82 −1.13 9.87 4.08 3.64 0.66 12.25
FOREIGN 6.80 4.25 3.7 14.9 12.49 6.82 0 20.7 6.86 11.64 0 27
GOVERNMENT 31.11 12.22 20.4 46 16.49 7.97 0 21.4 32.09 15.68 0 41.5
CAPRI 6.94 1.94 4 9 4.56 0.50 4 5 7.44 0.43 7 8
SPRI 11.25 1.72 9 13 13.44 0.50 13 14 11.81 2.15 9 14
ACTRI 9.56 2.35 6 12 11.56 0.50 11 12 10.19 2.15 8 13
MDPI 2.96 0.97 2 3.94 3.37 1.07 1.83 4.33 2.33 0.87 1.83 3.83
DEPI 0 0 0 0 0 0 0 0 0 0 0 0
SHPI 1.91 0 1.91 1.91 2.68 0 2.68 2.68 3.02 0 3.02 3.02
11
Table 2 (continued)
Variable Bahrain Kuwait Oman
CRPI 4 0 4 4 3.63 0.93 3 5 4 0 4 4

LEEI 40 0 40 40 50 0 50 50 50 0 50 50
N 128 176 320
Note: Table reports descriptive statistics for each country in the sample. Each column in the table shows mean value, standard deviation, minimum
value, maximum value for Standard deviation of ROA (SDROA), Standard deviation of ROE (SDROE), non-performing loans (NPL), loan loss
provision (LLP), Z-score index based on ROA (ZROA), and Z-score index based on ROE, Lerner Index, Boone indicator, Herfindahl–Hirschman Index
(HHI), 5-bank concentration ratio (CR5), bank size or natural log of total assets(SIZE), non-Interest revenue (NIR), cost-income-ratio (COST), equity
to total assets (EQTA), loan to total assets as a measured of liquidity (LIQ), annual GDP growth rate (GDP), annual inflation rate (INF), foreign
ownership (FOREIGN), government ownership (GOVERNMENT), capital requirements index (CAPRI), supervisory power index (SPRI), activity
restrictions index (ACTRI), market discipline index (MDPI), deposit insurance (DEPI), shareholder protection (SHPI), creditor protection (CRPI), and
legal efficiency (LEEI). The last row reports the number of observations for each country.
4. Methodology
To examine the impact of bank competition on bank risk-taking behavior, we follow Soedarmono et al. (2011, 2013), Beck,
Jonghe, and Schepens (2013), Lee and Hsieh (2013), Fu et al. (2014), and Kasman and Kasman (2015), who argue that in studies of
panel data, a dynamic model should be used to estimate the time persistence in the bank risk. Thus, the equation of a dynamic linear
model (1):
J J
RISKit = 0 + 1 RISK it 1 + 2 LERNER (L)it + 3 BOONE (L)it + 4 HHI (L)it + 5 CR5 (L)it + 6 BANit + 7 MACROit
j=1 j=1
J J J J
+ 8 Ownershipit + 9 Regulationit + 10 Environmentalit + 11 L × Regulationit
j=1 j =1 j =1 j=1
J
+ 12 L × Environmentalit + it
j=1 (5)
RISKit RISKit is the risk-taking of bank i over the period t and is proxied by six different parameters SDROA, SDROE, LLP, NPL,
ZROA and ZROE. β0 is a constant term; LERNERit LERNERit and BOONE it BOONEit are the Lerner index and Boone indicator
respectively used as measures of bank competition in country i at time t; HHIit CR5it HHIit is Herfindhal Hirschman index of banks’
assets, deposits, or loans in country i at time t; CR5it CR5it is the concentration ratio of five largest banks assets in a country i at time t;
BANitBANit , MACROit, Ownershipit, Regulationit, and Environmentalit, are the bank-specific characteristics, macroeconomic factors,
ownership variables, regulation variables, and environmental variables as a control variables in a country i at time t; and it ∊it is the
error term.
Previous studies in banking literature such as Al-muharrami et al. (2006), Chen and Liao (2011), and Tabak et al., (2015) examine
their empirical models by traditional estimators of panel data: pooled-OLS, and random effect and fixed effect. However, Baltagi
(2008) stress that random effect and fixed effect are biased estimators in a dynamic model of panel data. He also argues that pooled
OLS is biased and inconsistent even if εit are not serially correlated. Therefore, in the current study, we use the estimation of
generalized method of the moments (GMM), which helps to solve the endogeneity problem between the bank competition measures
and bank risk measures, capitalization levels, as well as loan risk. For example, well-capitalized banks may be able to merge with
other banks and extend their market power. Rapid growth in loans may result in the increase in the bank's assets and hence its size.
However, capitalization may also change with changes in the size of banks. Furthermore, the lagged bank risk is important because it
is possible that banks with high risk in the past year are more likely to face financial trouble in the next year (bank risk-taking
behavior is highly persistent). GMM addresses the endogeneity problem, unobserved heterogeneity, and the dependent variable
persistence (Fu et al., 2014; Kasman and Kasman, 2015; Lee and Hsieh, 2013). It uses lagged values of independent and dependent
variables in variance instruments. Moreover, GMM is more efficient than 2SLS because it accounts for heteroskedasticity (Hall, 2005;
Lee, Liang, Lin, & Yang, 2015).
There are two types of GMM estimator which are used to estimate dynamic panels: First, the ‘difference GMM estimator’ de-
veloped by Arellano and Bond (1991), and second, the ‘system GMM estimator’ developed by Arellano and Bover (1995). In the
difference GMM, the data is first-differenced to eliminate fixed effects, while in system GMM, data is estimated simultaneously in
differences and levels. Blundell and Bond (1998, 2000) argue that the system GMM performs better than the difference GMM because
it is more robust to capture efficiency gains and may reduce the finite sample bias. Sarafidis, Yamagata, and Robertson (2009) also
argue that the system GMM may probably deal serial correlation better in unbalanced panel data. Therefore, this study prefers the
system GMM due to the fact that the system GMM estimator addresses the unit root property problem and provides more accurate
findings (Bond, 2002).
12
System GMM estimator has the one-step and the two-step alternative. For the system GMM, Lee and Hsieh (2013) stress that the
two-step GMM estimator is usually more efficient than the one-step GMM estimator because it is more robust to the weak instruments
problem. Moreover, Windmeijer (2005) presents a corrected variance estimate for the two-step estimator which, according to him,
enables more accurate inferences than that of the one-step estimator due to lower bias and standard errors. For these reasons and in
line with the previous study in banking risk of Lee and Hsieh (2013), and Kasman and Kasman (2015), we use the two-step system
GMM estimator with Windmeijer (2005) corrected standard error to conduct the analysis. As the number of years (t) in our study are
18 years, the use of GMM estimator of Blundell and Bond (1998) and Arellano and Bover (1995) is justifiable.
The validity of the instruments is examined via Sargan-test of overidentifying restrictions. To test the autocorrelation, the
Arellano-Bond test for autocorrelation is used. The presence of first-order autocorrelation, AR (1), does not imply that the estimates
are inconsistent. The presence of second-order serial correlation, AR (2), would render the GMM estimator inconsistent and this is the
most important test. For this reason, the result for AR (2) should not reject the null hypothesis to ensure the consistency of the GMM
estimator. We assess our model during the time period 1998–2016.
5. Empirical results
5.1. Overall results
In Table 4 we report the empirical results of bank risk-taking behavior (Eq.-5) using the two-step system GMM dynamic estimator
using SDROA, SDROE, NPL, LLP, ZROA and ZROE as the dependent variables. We estimate four regressions for each dependent
variable. In each regression, we use the measure of bank competition. As shown in the table, the Wald-test displays the joint sig-
nificance of the variables and the Sargan-test shows that there is no evidence of over-identification restrictions. Although the analysis
indicates that the first-order autocorrelation is present, however, this does not mean that the assessments are inconsistent. The
estimation is inconsistent if the second-order autocorrelation is present (Arellano and Bond, 1991), but the same is rejected by the test
for AR (2). Hence, all GMM estimations are valid. In all estimations, the lagged endogenous variables (Lagt-1) are significant and
positive with parameter values almost 0.67 for SDROA, 0.77 for SDROE, 0.25 for NPL, 0.37 for LLP, 0.19 ZROA and 0.38 for ZROE,
confirming that there exists a high degree of persistence in the bank risk-taking.
The first column of each dependent variable in Table 4 shows the impact of market power measured by Lerner index together with
some bank-specific factors on bank risk-taking. The results show that the coefficient of market power (Lerner index) is negative and
significant with bank risk measures (SDROA, SDROE, NPL, and LLP), but positive and significant with bank stability measures (ZROA
and ZROE), suggesting more market power leads to decrease the bank risk-taking behavior and increase the stability (decrease the
insolvency risk).
The second column of each dependent variable in Table 4 presents the estimation results using the Boone indicator as the measure
of bank competition. The findings indicate that the impact of Boone indicator on SDROA, SDROE, NPL, and LLP as proxies of bank
risk is significantly negative, while it is significantly positive with ZROA and ZROE as measures of bank stability. As the higher
negative values of the Boone indicator imply less competition and vice-versa, our findings suggest that competition lead to an
increase in the risk-taking behavior of GCC banks and decrease banking stability. The significant and positive relationship between
the Boone indicator and bank stability (ZROA and ZROE) supports the negative effect of competition on bank stability.
These findings are in line with the results of Agoraki et al. (2011) in Central and Eastern European banks, Fu et al. (2014) in the
Asia Pacific, and Kasman and Kasman (2015) in Turkey. However, their findings are not in valence with the results of Soedarmono
et al. (2011, 2013) in 12 Asian economies, Liu, Molyneux, and Nguyen (2012) for South East Asian commercial banks, and Yeyati and
Micco (2007) in 8 Latin American countries.
As shown in column 3 and 4 of Table 4, the effect of market concentration measured by HHI and CR5 on bank risk measures
(SDROA, SDROE, NPL, and LLP) are positive and significant, indicating that banks in more concentrated markets take higher risk.
Furthermore, the findings show that the relationship of HHI and CR5 with ZROA and ZROE are negative and significant, confirming
that in GCC economies with higher banking concentration are not stable. Ashraf et al. (2016) examine HHI with Z-score and find
similar results for GCC banks. In general, our results support the view that higher banking concentration and lower pricing power
results in bank fragility.
In all regressions, the coefficient of the bank size (SIZE) is negative and significantly related to bank risk measures, while it is
positively and significantly related to bank stability, implying that larger banks are more stable and less risky. Non-interest revenue
(NIR) has a positive relationship with bank risk and has a negative relationship with stability in all the regressions, suggesting that
banks that more engaged in non-traditional activities are riskier and less stable. The positive relationship of the cost-to-income ratio
(COST) on SDROA, SDROE, NPL, LLP and negative relationship with ZROE, suggests that the inefficiency in managing cost make
banks riskier and less stable. In all estimations, the relationship between capitalization (EQTA) and bank risk measures are negative
and significant, whereas it is positive and significant with bank stability, implying that banks with higher capitalization have lower
risk and are more stable. Meanwhile, the coefficient of bank liquidity (LIQ) measured by loans-total assets ratio bears a negative and
significant relationship with bank risk-taking and shows a positive and significant relationship with bank stability indicating that
higher degree of loan exposure (lower liquidity) decrease the bank risk-taking and enhance stability. These reflect that GCC banks
have the ability to manage and monitor their loans portfolio well which results in higher stability. The coefficient of the GDP growth
rate on different risk-taking variables is negative and significant, while its coefficient on stability measures is positive and significant,
meaning higher economic growth rate decreases the risk and boost banks’ stability. In another word, banks accumulate risks more
rapidly in economically bad times and some of these risks materialize as asset quality deteriorates during subsequent recessions.
13
Table 3
Correlation matrix.
No 1 2 3 4 5 6 7 8 9 10 11 12 13
1 SDROA 1
2 SDROE .392* 1
3 NPL .614* .227* 1

4 LLP .545* .289* .510* 1
5 ZROA −.111* −.062* −.084* −.044* 1
6 ZROE −.118* −.078* −.104* −.062* .173* 1
7 Lerner −.122* −0.002* −.217* −0.053* .126* .197* 1
8 Boone −.260* −.060* −.266* −.247* .042* .092* −.397* 1
9 HHI .077* 0.034* .084* 0.053* −.050* −.110* −.078* 0.035 1
10 CR5 0.042* 0.019* .183* 0.041* −.035* −.035* −.295* .306* .362* 1
11 SIZE −.366* −.070* −.413* −.128* 0.061* .169* .422* −.249* .246* −.220* 1
12 NIR .344* .088* .323* .108* −.064* −.084* −.169* .284* −.073* .075* −.259* 1
13 COST .362* .070* .420* .218* −.044 −.107* −.111* .209* −.067* 0.053 −.322* .208* 1
14 EQTA −.277* −0.017* −0.037* −0.013* .016* .075* −.120* .093* −.123* 0.025 −.491* .199* .335*
15 LIQ −.290* −0.044* −.335* −.189* .072* .072* .161* −.318* 0.04 −.175* .162* −.411* −.205*
16 GDP −0.060* −0.109* −0.063* −0.072* 0.003* 0.018* 0.020 −0.050 0.127* 0.219* −0.035 0.055* −0.089*
17 INF 0.029* 0.045* 0.168* 0.056* −0.069* −0.082* 0.004 −0.220* −0.004 −0.161* 0.112* 0.026 −0.098*
18 FORE 0.298* 0.063* 0.203* 0.035* −0.029* −0.095* −0.294* 0.549* −0.036* 0.166* −0.321* 0.269* 0.231*
19 GOVE −0.154* −0.066* −0.162* −0.014* 0.063* 0.033* 0.294* −0.253* 0.036* −0.080* 0.280* −0.097* −0.163*
20 CAPRI 0.003* 0.043* −0.068* 0.009* 0.076* 0.049* 0.213* −0.013* −0.017* 0.058 0.052* −0.099* 0.023*
21 SPRI 0.067* −0.043* 0.115* −0.011* −0.050* −0.079* −0.476* 0.081* −0.002* −0.164* −0.319* 0.118* 0.083*
22 ACTRI −0.049* −0.027* −0.060* 0.029* −0.040* 0.065* 0.038* −0.017* −0.057 −0.260* 0.201* −0.098* 0.011*
14
23 MDPI 0.123* 0.080* 0.095* 0.024* −0.073* −0.046* −0.076* 0.120* 0.025* 0.091* −0.155* 0.096* 0.036*
24 DEPI 0.253* 0.047* 0.251* 0.038* −0.059* −0.099* −0.472* 0.387* 0.029* 0.315* −0.417* 0.195* 0.286*
25 SHPI −0.071* −0.01* −0.032* 0.025* 0.047* 0.010* 0.144* −0.413* −0.303* −0.365* 0.085* −0.027* −0.068*
26 CRPI −0.010* 0.001* 0.004* 0.001* 0.080* 0.109* 0.062 0.192* 0.029* 0.127* 0.009* 0.029* 0.013*
27 LEEI −0.154* −0.103* −0.151* −0.026* 0.048* 0.062* 0.182* −0.494* −0.222* −0.541* 0.250* −0.096* −0.145*
No 14 15 16 17 18 19 20 21 22 23 24 25 26 27
1
2
3
4
5
6
7
8
9
10
11
12
13
14 1
15 −.160* 1
16 0.054* −0.049 1
17 −0.006 0.122* 0.240* 1
Table 3 (continued)
No 14 15 16 17 18 19 20 21 22 23 24 25 26 27
18 0.165* −0.345* 0.020* −0.089* 1

19 −0.066* 0.256* 0.129* 0.320* −0.399* 1
20 −0.005* 0.161* −0.147* 0.104* −0.011* 0.166* 1
21 0.087* −0.090* 0.042* −0.051 0.260* −0.279* −0.528* 1

22 −0.006* 0.120* −0.244* −0.159* −0.209* 0.215* −0.071* −0.135* 1
23 0.015* −0.275* 0.034* −0.172* 0.297* −0.393* −0.231* 0.197* −0.063* 1
24 0.184* −0.236* −0.137* −0.223* 0.556* −0.569* −0.097* 0.287* 0.020* 0.184* 1
25 −0.043* 0.170* −0.313* 0.070* −0.219* 0.193* 0.140* −0.048* 0.001* −0.206* −0.354* 1
26 0.022* 0.125* 0.003* 0.071* 0.048* 0.057 0.274* −0.171* −0.061* −0.446* 0.098* −0.023* 1
27 −0.068* 0.225* −0.101* 0.113* −0.373* 0.511* −0.141* 0.119* 0.295* −0.280* −0.384* 0.507* −0.169* 1
Note: Table reports descriptive statistics for each country in the sample. Each column in the table shows mean value, standard deviation, minimum value, maximum value for Standard deviation of ROA
(SDROA), Standard deviation of ROE (SDROE), non-performing loans(NPL), loan loss provision (LLP), Z-score index based on ROA (ZROA), and Z-score index based on ROE, Lerner Index, Boone indicator,
Herfindahl-Hirschman Index (HHI), 5-bank concentration ratio (CR5), bank size or natural log of total assets(SIZE), non-Interest revenue (NIR), cost-income-ratio (COST), equity to total assets (EQTA),
and loan to total assets as a measured of liquidity (LIQ), annual GDP growth rate (GDP), annual inflation rate (INF), foreign ownership (FOREIGN), government ownership (GOVERNMENT), capital
requirements index (CAPRI), supervisory power index (SPRI), activity restrictions index (ACTRI), market discipline index (MDPI), deposit insurance (DEPI), shareholder protection (SHPI), creditor
protection (CRPI), and legal efficiency (LEEI). * Indicate the significance of correlation at 1%.
15
Table 4
Estimation results of bank risk-taking behavior equation with the whole sample period (1998–2016)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .692*** .683*** .651*** .654*** .782*** .769*** .765*** .763*** .258*** .229*** .245*** .276***
(.029) (.029) (.028) (.027) (.031) (.028) (.027) (.0001) (.003) (.003) (.002) (.001)
Lerner index −.409*** −36.81*** −4.791***
(.029) (.611) (.211)
Boone indicator −18.08*** −115.41*** −79.35***
(.133) (1.444) (.727)
HHI .002** .005*** .003***
(.0001) (.0001) (.0009)
CR5 .021** .147*** .008***
(.009) (.001) (.0007)
SIZE −2.301*** −2.315*** −.324** −.299** −1.43*** −2.372*** −2.465*** −2.522*** −4.514*** −4.552*** −4.340*** −3.947***
(.146) (.138) (.135) (.131) (.078) (.006) (.035) (.041) (.048) (.024) (.030) (.036)
NIR .016*** .017*** .020*** .017*** .365*** .360*** .353*** .341*** .048*** .083*** .044*** .051***
(.005) (.005) (.005) (.005) (.081) (.078) (.078) (.001) (.001) (.001) (.001) (.001)
COST .017*** .012*** .018*** .017*** .073*** .038*** .072*** .078*** .031*** .011*** .035*** .033***
(.003) (.003) (.003) (.003) (.005) (.005) (.005) (.003) (.0002) (.0002) (.0002) (.0002)
EQTA −.053*** −.051*** −.061*** −.055*** −.324*** −.339*** −.342*** −.326*** −.029*** −.063*** −.013*** −.026***
(.017) (.017) (.017) (.016) (.065) (.055) (.057) (.004) (.001) (.001) (.002) (.004)
LIQ −.019*** −.014*** −.022*** −.022*** −.087*** −.074*** −.095*** −.091*** −.046*** −.041*** −.056*** −.048***
(.005) (.005) (.005) (.005) (.008) (.007) (.007) (.003) (.0006) (.001) (.001) (.002)
16
GDP −.045*** −.032*** −.051*** −.043*** −.978*** −.901*** −1.037*** −.992*** −.181*** −.162*** −.229*** −.195***
(.001) (.002) (.002) (.002) (.009) (.006) (.009) (.007) (.002) (.002) (.007) (.005)
INF .090*** .083*** .074*** .069*** 1.008*** 1.198*** 1.354*** 1.067*** .356*** .251*** .265*** .280***
(.002) (.002) (.005) (.003) (.021) (.015) (.0128) (.019) (.0028) (.003) (0.004) (.006)
Country dummy Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Time dummy Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Intercept 5.779*** 5.929*** 4.712** 7.022** 61.65** 61.31* 61.09* 68.705*** 78.49*** 77.92*** 74.39*** 67.53***
(1.442) (1.334) (2.279) (2.376) (30.83) (32.85) (31.79) (.681) (.787) (.284) (.435) (.535)
No. observations 993 993 997 997 993 993 997 997 1001 1001 1010 1010
No. banks 70 70 70 70 70 70 70 70 70 70 70 70
Wald-test 998.3*** 1072.9*** 1064.5*** 1124.3*** 683.6*** 788.6*** 853.7*** 901.9*** 500.6*** 577.7*** 562*** 546.2***
Sargan P value 0.9993 0.9991 1.0000 1.0000 0.9996 0.9995 1.0000 0.9999 0.9994 0.9990 1.0000 1.0000
AR(1) P value 0.0999 0.0960 0.0943 0.0937 0.2918 0.2885 0.2919 0.2917 0.0376 0.0171 0.0345 0.0282
AR(2) P value 0.5457 0.3933 0.5700 0.5553 0.3156 0.3119 0.3163 0.3157 0.3286 0.3884 0.2996 0.3271
LLP ZROA ZROE
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .361*** .370*** .371*** .383*** .297*** .185*** .131*** .137*** .346*** .399*** .360*** .395***
(.001) (.026) (.0008) (.0005) (.002) (.001) (.001) (.0004) (.001) (.002) (.001) (.002)
Lerner index −.289** 60.72*** 47.53***
(.132) (9.472) (.775)
Boone indicator −22.130*** 196.61*** 54.89***
(5.196) (24.871) (2.366)
Table 4 (continued)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
HHI .001*** −.056*** −.006***

(.0002) (.004) (.0002)

CR5 .012** −2.513*** −.510***
(.001) (.028) (.007)
SIZE −.641*** −.787*** −.753*** −.680*** 15.939*** 16.032*** 39.055*** 36.028*** .676*** 2.515*** 3.405*** 3.467***
(.010) (.016) (.010) (.011) (1.249) (1.025) (.682) (.817) (.059) (.037) (.098) (.101)
NIR .049*** .045*** .048*** .044*** −.940*** −1.216*** −1.154*** −.978*** −.077*** −.077*** −.081*** −.039***
(.0003) (.008) (.0006) (.0002) (.082) (.091) (.028) (.070) (.006) (.003) (.008) (.004)
COST .037*** .030*** .038*** .037*** −.005 −.016 .013 −.026 −.012*** −.005* −.014*** −.007)**
(.0001) (.004) (.0001) (.0001) (.018) (.012) (.021) (.020) (.004) (.002) (.007) (.003
EQTA −.067*** −.077*** −.067*** −.061*** 2.533*** 1.470*** 1.908*** 1.685*** .118*** .179*** .157*** .064***
(.0005) (.024) (.001) (.0005) (.166) (.205) (.074) (.065) (.015) (.013) (.013) (.011)
LIQ −.013*** −.006*** −.009*** −.011*** .393*** .602*** 1.409*** 1.366*** .064*** .082*** .065*** .057***
(.0005) (.0008) (.0008) (.0004) (.022) (.032) (.032) (.034) (.005) (.004) (.003) (.004)
GDP −.0318*** −.018*** −.022*** −.029*** .134*** .194*** .0794*** .129*** .444*** 1.078*** .516*** .866***
(.003) (.002) (.002) (.0017) (.013) (.006) (.007) (.009) (.066) (.110) (.193) (.0932)
INF .0188*** .043*** .042*** .023*** −.432*** −.782*** −.842*** −.693*** −7.839*** −11.18*** −12.08*** −11.07***
(.003) (.002) (.002) (.0029) (.025) (.012) (.013) (.011) (.189) (.129) (.260) (.210)
Intercept 12.85*** 15.23*** 14.36*** 12.94*** −45.44*** −92.56*** −44.98*** −54.0*** −21.20*** −27.22*** −42.90*** −72.99***
17
(.162) (3.534 (.185) (.149) (3.684) (13.95) (1.539) (3.728) (1.493) (.537) (1.884) (1.945)
No. observations 1001 1001 1010 1010 993 993 997 997 993 993 997 997
No. banks 70 70 70 70 70 70 70 70 70 70 70 70
Wald-test 375.5*** 426.8*** 428.6*** 449.7*** 720.4*** 330.8*** 330.6*** 400.5*** 1480.1*** 1501.9*** 800.5*** 1160.9***
Sargan P value 0.9988 0.9984 1.0000 1.0000 0.9998 0.9972 1.0000 1.0000 0.9991 0.9990 1.0000 1.0000
AR(1) P value 0.0568 0.0597 0.0620 0.0691 0.0069 0.0098 0.0917 0.0916 0.0103 0.0064 0.0053 0.0032
AR(2) P value 0.4273 0.4787 0.4275 0.3949 0.2686 0.2212 0.5367 0.4750 0.5672 0.9052 0.9133 0.7932
Note: Table reports estimation results for the impact of bank competition on bank risk-taking behavior for overall period (2000-2016) using two-step system GMM dynamic panel model by Arellano and
Bover (1995). The dependent variables are the standard deviation of ROA (SDROA), Standard deviation of ROE (SDROE) calculated from a three-period based rolling window, non-performing loans to
total loans (NPL), loan loss provision to total loans (LLP), Z-score index based on ROA (ZROA), and Z-score index based on ROE. Lerner Index, Boone indicator, Herfindahl–Hirschman Index (HHI), and 5-
bank concentration ratio (CR5) are the market power indexes. SIZE is the logarithm of total assets. NIR refer to income diversification of banks measured by non-Interest revenue to total revenue. COST is
the ratio of operating expenses to total income. EQTA refers to the bank capitalization calculated as the ratio of total equity to total assets. LIQ refer to bank liquidity calculated by the ratio of total loans to
total assets.GDP is annual GDP growth rate. INF IS annual inflation rate. The Sargan test is the test for over-identifying restrictions in GMM estimation. AB test AR(1) and AR(2) refer to the Arellano–Bond
test that average autocovariance in residuals of order 1 resp. of order 2 is 0 (H0: no autocorrelation). The standard errors are in parentheses. *** Significance at the 1% level, ** Significance at the 5%
level,* Significance at the 10% level.
Furthermore, the effects of inflation on bank risk and stability are positive and negative respectively; higher rate of inflation is
associated with higher risk and lower stability in matured banks. This means that economic uncertainty caused by inflation stimulates
banks to restrict credit. The coefficients on time dummy variables (not shown in the table) are significant but signs are varied. For the
years 2007, 2008 and 2009, the coefficients are positive and significant with bank risk and negative and significant with bank
stability, indicating that risk of GCC banks is higher and the stability is lower during the recent global financial crisis 2008 compared
to other years.
5.2. Pre, during and post global financial crisis periods
During the phase of economic slowdown arising out of financial crisis, banks in general, tend to reduce their lending activities and
increase the capital position to strengthen their ability to absorb possible shocks arising out of crisis and/or to strengthen their
competitive position. Mishkin (1999) argue that large decline in the capital ratios during a financial crisis, which adversely affects
their franchise value, may encourage banks to imprudent lending decisions during the crisis period. Given the importance of franchise
value of banks, we have also analysed whether market power or market concentration in the GCC banking sector during the financial
crisis period have any moderating effect on the issue of moral hazard by engaging into imprudent lending activities by banks.
We have conducted the analysis by dividing the sample into 3 sets: subsample for the pre-financial crisis period (1998–2006),
subsample period for the period of financial crisis (2007–2009), and the subsample for post-financial crisis period (2010–2016). The
Definition of the financial crisis period adopted in our study is based on prior studies (Fu et al., 2014; Kasman and Kasman, 2015;
Khan et al., 2016; Soedarmono et al., 2013). In the 3 subsamples, we have introduced time fixed effects and country fixed effects.
The mean values of main variables over every subsample period are presented in Table 5. The mean values of bank risk measured
by SDROA, SDROE, and LLP during the financial crisis are significantly high, while the mean values of bank stability proxied by
ZROA and ZROE during the financial crisis period are significantly low. These indicate that GCC listed commercial banks have been
adversely affected by the global financial crisis, which made them riskier and less stable as compared to their position during the pre
and post-financial crisis periods. However, the mean NPL is noticeably low during the crisis period compared to pre and post-crisis
period, which may be due to a decline in the lending activities (loan growth is 22.5% during the financial crisis compared to 24.2%
and 25.9% over pre and post-crisis period respectively) and loan write-offs by GCC banks at that time Among others, Khan et al.
(2016) also notes that Asian banks witnessed a decline in their lending activities during the period of financial crisis. Unlike the
Boone indicator, the mean values of market power and concentration indicators show a decline during the financial crisis period and
a sharp increase in the post-crisis period. The sharp and significant increase in Boone indicator suggests that the level of competition
in banking market continues to decline. The profile of Boone indicator reflects that there is a decline in the competitive situation in
the GCC banking market during and after the financial crisis.
We have used the two-step system GMM to analyze the sample groups of pre-crisis (1998–2006) and post-crisis (2010–2016).
However, for the sample group of financial crisis period (2007–2009), we apply the Least Square Dummy Variable (LSDV) model to
avoid the problem of small sample size. The estimation results for the 3 subsamples: 1998–2006 (pre-crisis), 2007–2009 (during the
crisis), and 2010–2016 (post-crisis) are reported in Tables 6–8 respectively.
Results from Tables 6 and 8 suggest that market structure indicators and control variables in pre and post-crisis period are similar
to the findings of our overall findings as has been reported in Table 4. However, Table 7 shows that during crisis period 2007–2009,
higher Lerner index (higher market power) and higher Boone indicators (lower competition) in banking market have a negative
impact on bank risk-taking (SDROA, SDROE, NPL, and LLP) as well as bank stability (ZROA and ZROE).
In contrast, we also find that higher market concentration (HHI and CR5) has a positive significant effect on bank risk-taking
measures and bank stability measures. The level of significance of market power, competition, and concentrations with the measures
of stability is, however, significant only at the level of 10%. Overall, banks in less competitive GCC markets carry a lower risk of
insolvency (still stable) during the financial crisis period 2007–2009. This may due to the fact that 2008 financial crisis has indirectly
affected GCC banks. Our main results suggest that bank risk-taking behavior and stability did not change significantly during the
Table 5
Mean values of variables in subsamples.
Variable Subsample 1998–2006 Subsample 2007–2009 Subsample 2010–2016
SDROA 0.813809 1.47618 0.930743

SDROE 4.55443 12.6590 6.26294
NPL 8.84892 4.83549 5.39336
LLP 0.847492 1.26146 0.945122
ZROA 41.88182 36.98464 75.01142
ZROE 8.715275 4.825798 14.72832
Lerner index 0.431735 0.428911 0.529755
Boone indicator −0.0221302 −0.0109342 −0.00867350
HHI 155.476 93.1731 97.8435
CR5 61.6940 55.5814 58.7159
Note: Table displays the mean values of bank risk-taking and market power indicators for three subsamples. Subsample 2007–2009 represents the
global financial crisis period.
18
Table 6
Estimation results of bank risk-taking behavior equation before the global financial crisis period (1998–2006).
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .560*** .619*** .537*** .532*** .636*** .642*** .651*** .641*** .580*** .573*** .716*** .587***
(.009) (.037) (.013) (.012) (.011) (.013) (.012) (.017) (.048) (.057) (.033) (.046)
Lerner index −2.361*** −6.342** −31.29***
(.175) (1.654) (4.162)
Boone indicator −5.490*** −5.764** −56.79***
(1.217) (2.630) (11.30)
HHI .001*** .057*** .006***
(.0002) (.001) (.001)
CR5 .008*** .041** .104**
(.002) (.016) (.043)
SIZE −.008 −.749*** −.004 −.148*** −.301* −.379** .219 −.773** −12.86*** −11.04*** −14.52*** −13.23***
(.054) (.116) (.055) (.054) (.159) (.156) (.221) (.256) (1.009) (1.440) (.996) (1.246)
NIR .014*** .019*** .018*** .017*** .023*** .022*** .014** .030** .248*** .243*** .315*** .225***
(.002) (.007) (.002) (.002) (.006) (.006) (.007) (.007) (.026) (.030) (.034) (.030)
COST .013*** .005** .011*** .011*** .015** .014** .017** .012** .176*** .190*** .291*** .206***
(.002) (.002) (.002) (.003) (.006) (.006) (.005) (.005) (.037) (.036) (.031) (.035)
EQTA −.013*** −.038*** −.015* .001 .003 −.035* .019 −.037* −.596*** −.391*** −.370*** −.537***
(.003) (.008) (.008) (.003) (.021) (.018) (.017) (.019) (.125) (.104) (.061) (.109)
LIQ −.012** .0004 .002 .002 −.012** −.017* −.014** −.020** −.022** −.029** −.030** −.020*
(.005) (.002) (.002 (.002) (.006) (.009) (.007) (.009) (.010) (.012) (.012) (.010)
19
GDP −.0138*** −.00615** −.0121*** −.0105*** −.0055 −.0020 −.0166 −.0139 −.165*** −.309*** −.313*** −.234***
(.003) (.003) (.002) (.0029) (.0200) (.023) (.0178) (.0199) (.043) (.0449) (.0417) (.0473)
INF .0429*** .0097 .0014 .0195 .262*** .285*** .310*** .312*** .629*** 1.009*** 1.061*** .807***
(.011) (.009) (.0121) (.014) (.0617) (.069) (.058) (.0562) (.187) (.205) (.241) (.210)
Intercept −1.31 10.52*** −.570 1.960** −2.78 −3.95* −.654 −1.65 218.26*** 172.58*** 220.82*** 212.92***
(.894) (1.838) (.928) (.901) (2.10) (2.10) (3.74) (4.83) (16.84) (22.51) (15.69) (20.89)
No. observations 363 363 367 367 363 363 367 367 371 371 380 380
No. banks 57 57 57 57 57 57 57 57 61 61 61 61
Wald-test 918.4*** 302.9*** 1325*** 418.9*** 902.2*** 802.2*** 789.9*** 660.6*** 1055.6*** 1439.5*** 1118.2*** 1201.6***
Sargan P value 0.1375 0.1504 0.2338 0.1765 0.3326 0.2920 0.2180 0.2122 0.1299 0.1751 0.1586 0.1051
AR(1) P value 0.0779 0.3087 0.0744 0.0632 0.0159 0.0161 0.0196 0.0182 0.0701 0.0256 0.0687 0.0435
AR(2) P value 0.9306 0.7382 0.9310 0.9170 0.1981 0.1890 0.1793 0.2007 0.5075 0.2845 0.3317 0.3369
LLP ZROA ZROE
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .218*** .168*** .139*** .147*** .144*** .121*** .095*** .131*** .281*** .295*** .253*** .307***
(.018) (.019) (.005) (.009) (.016) (.014) (.013) (.013) (.013) (.013) (.013) (.013)
Lerner index −2.675*** 38.18*** 10.83***
(.432) (7.615) (2.749)
Boone indicator −16.46*** 49.99*** 58.015**
(1.771) (7.390) (25.739)
Table 6 (continued)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
HHI .009** −.045*** −.003*

(.004) (.006) (.001)

CR5 .0004 −.456** −.034**
(.002) (.155) (.012)
SIZE −.991*** −.667*** −.892*** −.778*** 60.51*** 27.77*** 43.29*** 45.01*** 5.942*** 5.171*** 4.518*** 5.060***
(.075) (.056) (.053) (.066) (8.740) (7.821) (7.475) (7.474) (.748) (.649) (.875) (.813)
NIR .014*** .017*** .023*** .019*** −.599* −.493* −.675** −.516** −.067** −.021 −.053* −.042*
(.002) (.002) (.001) (.001) (.331) (.298) (.292) (.219) (.027) (.028) (.028) (.022)
COST .033*** .038*** .010*** .012*** −.018 −.068 .039 .126 −.076*** −.079*** −.156*** −.045**
(.005) (.003) (.003) (.003) (.290) (.347) (.274) (.281) (.021) (.022) (.036) (.014)
EQTA −.001 .002 −.013** −.003 .445 .307 .474 .161 .159*** .147*** .124*** .124**
(.007) (.006) (.006) (.005) (.703) (.675) (.784) (.772) (.044) (.046) (.056) (.050)
LIQ −.002 −.005* −.005** −.006*** .204** 2.161** 2.132** .295** .043** .049** .035** .049**
(.003) (.003) (.002) (.002) (.108) (.178) (.182) (.101) (.015) (.024) (.014) (.024)
GDP −.003 −.0180*** −.00588 −.0034 .396 1.876** .387 1.267* .190 .274** .00993 .251*
(.0048) (.00572) (.00495) (.004) (.697) (.776) (.646) (.710) (.151) (.133) (.112) (.143)
INF .060*** .0334 .0244 .032 −12.2*** −5.617*** −7.824*** −10.31*** −.468** −1.072*** −.161 -.531**
(.020) (.0227) (.0218) (.021) (1.24) (1.517) (2.320) (1.857) (.237) (.262) (.236) (.241)
Intercept 17.80*** 12.24 13.83*** 12.56*** 1128.9*** 498.84*** 729.34*** 775.18** 96.71*** 88.94*** 78.70*** 86.95***
20
(1.45) (.918) (.786) (1.060) (157.82) (130.36) (131.21) (129.12) (10.730) (10.28) (14.46) (12.44)
No. observations 371 371 380 380 363 363 367 367 363 363 367 367
No. banks 61 61 61 61 57 57 57 57 57 57 57 57
Wald-test 849.8*** 1047.5*** 1506.7*** 1060.4*** 2371.7*** 1898.3*** 1649.8*** 1596.5*** 1406*** 602.1*** 1642.5*** 1288.3***
Sargan P value 0.2920 0.1924 0.2186 0.3354 0.5716 0.4492 0.4332 0.4657 0.1251 0.1897 0.1905 0.2279
AR(1) P value 0.1070 0.1222 0.1283 0.1214 0.2025 0.1979 0.1967 0.1976 0.0193 0.0237 0.0101 0.0137
AR(2) P value 0.6959 0.4591 0.3683 0.3488 0.6319 0.4030 0.4426 0.5124 0.3298 0.3227 0.3309 0.3098
Note: Table reports estimation results for the impact of bank competition on bank risk-taking behavior in the pre-global financial crisis period (2000–2006) using two-step system GMM dynamic panel
model by Arellano and Bover (1995). The dependent variables are the standard deviation of ROA (SDROA), Standard deviation of ROE (SDROE) calculated from a three-period based rolling window, non-
performing loans to total loans (NPL), loan loss provision to total loans (LLP), Z-score index based on ROA (ZROA), and Z-score index based on ROE. Lerner Index, Boone indicator, Herfindahl-Hirschman
Index (HHI), and 5-bank concentration ratio (CR5) are the market power indexes. SIZE is the logarithm of total assets. NIR refer to income diversification of banks measured by non-Interest revenue to
total revenue. COST is the ratio of operating expenses to total income. EQTA refers to the bank capitalization calculated as the ratio of total equity to total assets. LIQ refer to bank liquidity calculated by
the ratio of total loans to total assets. GDP is annual GDP growth rate. INF IS annual inflation rate. The Sargan test is the test for over-identifying restrictions in GMM estimation. AB test AR(1) and AR(2)
refer to the Arellano–Bond test that average autocovariance in residuals of order 1 resp. of order 2 is 0 (H0: no autocorrelation). The standard errors are in parentheses. *** Significance at the 1% level, **
Significance at the 5% level. * Significance at the 10% level.
Table 7
Estimation results of bank risk-taking behavior equation during the global financial crisis period (2007–2009).
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .132** .124** .236** .195** .982*** .998*** .991*** .999*** 1.158** .389** 3.175*** 2.067***
(.069) (.065) (.099) (.095) (.017) (.034) (.018) (.025) (.454) (.195) (.702) (.525)
Lerner index −14.508*** −36.330** −43.67***
(4.955) (12.789) (11.699)
Boone indicator −3.152** −14.80** −35.16**
(1.911) (5.94) (12.813)
HHI .012** .252** .099**
(.006) (.117) (.035)
CR5 .117** .531** .186**
(.057) (.226) (.073)
SIZE −5.111*** −4.306*** −7.409*** −4.388*** −27.162** −29.261** −51.148** −26.751** −4.363*** −1.520** −1.168** −1.919**
(.974) (.977) (1.362) (.973) (11.264) (11.695) (23.314) (11.755) (1.362) (.691) (.669) (.367)
NIR −.028** −.026* −.029* −.031** −.603** −.628** −.725** −.587*** −.079** −.002 −.089* −.081*
(.014) (.014) (.015) (.015) (.235) (.231) (.259) (.139) (.039) (.031) (.045) (.041)
COST .012** .013** .016** .014** .025 .016 .001 .036 .058** .031** .054** .034**
(.005) (.006) (.003) (.005) (.136) (.134) (.163) (.134) (.019) (.015) (.024) (.019)
EQTA −.317*** −.302*** −.334*** −.335*** −1.771*** −1.422*** −1.791*** −2.017*** −.621*** −.408*** −.655*** −.677***
(.075) (.079) (.081) (.082) (.256) (.272) (.384) (.338) (.176) (.112) (.203) (.196)
LIQ .039** .031** .032** .036** −.018 −.012 −.033 −.041 .074** .063** .098** .087**
(.013) (.014) (.015) (.010) (.013) (.220) (.261) (.223) (.031) (.028) (.038) (.032)
21
GDP −.05226*** −.0337** −.402** −.0677* −13.66** −3.679** −33.642** −3.253** −1.694** −.489** −.489** −.0330**
(.018) (.014) (.151) (.0384) (5.01) (1.244) (1.366) (1.288) (.802) (.222) (.200) (.0143)
INF .0807** .0259** −.0707*** .0542*** 3.729** .861** 2.458** 2.405** .750** .337** .0553*** .213
(.036) (.0‘103) (.025) (.014) (1.230 (.305) (1.076) (.950) (.314) (.121) (.019) (.258)
Intercept 82.05*** 75.50*** 126.09*** 74.46*** 48.47** 52.88** 88.28** 46.48 38.63** 33.12** −40.25** 36.88
(15.42) (16.01) (22.19) (15.67) (15.73) (25.02) (37.62) (25.63) (15.59) (15.70) (18.46) (38.52)
No. observations 210 210 210 210 210 210 210 210 210 210 210 210
No. banks 70 70 70 70 70 70 70 70 70 70 70 70
F-statistic 19.65*** 17.72*** 20.59*** 17.86*** 12.41** 12.69*** 12.66*** 12.44*** 15.03*** 13.41*** 12.69*** 12.9***
R-square 0.44 0.38 0.47 0.38 0.31 0.32 0.33 0.31 0.32 0.35 0.33 0.33
LLP ZROA ZROE
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 −.390** −.411** −.534** −.414** .633*** .594*** 708** .621*** .374** .338** .896** .471***
(.179) (.200) (.243) (.214) (.172) (.195) (.359) (.173) (.162) (.143) (.404) (.127)
Lerner index −19.449** −73.105* −16.401*
(7.777) (36.252) (8.06)
Boone indicator −16.645** −64.649* −15.605*
(7.619) (37.661) (7.799)
HHI .031** .079* .027*
(.011) (.040) (.014)
Table 7 (continued)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
CR5 .190** .089* .226*

(.088) (.045) (.114)

SIZE −3.615** −2.896** −3.221 −2.772* 10.916** 13.951** 18.238** 9.937** .991** .991** 2.482** 1.832*
(1.483) (1.433) (2.065) (1.464) (4.177) (6.665) (8.949) (4.715) (.470) (.452) (.878) (.935)
NIR −.051** −.045*** −.041** −.031** .040** .057*** .089** .051** .061** .071** .079** .060**
(.020) (.015) (.015) (.012) (.019) (.015) (.042) (.022) (.028) (.029) (.032) (.029)
COST .042*** .045*** .061*** .047*** −.046 −.037 −.054 −.053 −.031** −.027** −.026** −.027**
(.013) (.013) (.015) (.013) (.127) (.126) (.132) (.125) (.016) (.011) (.012) (.011)
EQTA −.253** −.220** −.277** −.298** 2.430** 1.953** 3.814*** 2.217*** −.003 −.018 −.059 −.062
(.105) (.107) (.115) (.116) (1.171) (.589) (1.124) (.249) (.152) (.158) (.1708) (.164)
LIQ .044** .046** .051** .066*** −.395** −.489** −.053** −.038** −.001 .043* −.067** −.057**
(.021) (.021) (.024) (.016) (.171) (.206) (.021) (.018) (.027) (.027) (.032) (.027)
GDP −.0795 −.151*** −.0722*** −.173** .377** .866*** .556** .361** 1.950*** 1.379*** 2.089*** 1.482***
(.065) (.0143) (.0115) (.0197) (.111) (.220) (.272) (.153) (.109) (.013) (.278) (.490)
INF .568*** .137*** .0882*** .0308** −.420** −.376** −.320* −.227* −.480* −.222 −.834** −.552*
(.139) (.0735) (.0147) (.0141) (.206) (.126) (.182) (.131) (.249) (.343) (.407) (.307)
Intercept 53.923** 50.84** 66.60* 44.41* −78.83 −20.32 −26.48 −199.67* 5.88 16.36 −2.36 15.95
(23.528) (24.01) (33.77) (23.65) (72.49) (24.16) (30.54) (109.88) (31.32) (31.97) (46.86) (31.14)
No. observations 210 210 210 210 210 210 210 210 210 210 210 210
22
No. banks 70 70 70 70 70 70 70 70 70 70 70 70
F-statistic 16.94*** 16.07*** 15.93*** 15.88*** 13.26*** 13.47*** 14.26*** 13.24*** 14.34*** 13.60*** 13.59*** 13.92***
R-square 0.35 0.33 0.34 0.33 0.26 0.27 0.31 0.26 0.31 0.27 0.28 0.29
Note: Table reports estimation results for the impact of bank competition on bank risk-taking behavior during the global financial crisis period (2007–2009) using Least Square Dummy Variable (LSDV)
technique. The dependent variables are the standard deviation of ROA (SDROA), Standard deviation of ROE (SDROE) calculated from a three-period based rolling window, non-performing loans to total
loans (NPL), loan loss provision to total loans (LLP), Z-score index based on ROA (ZROA), and Z-score index based on ROE. Lerner Index, Boone indicator, Herfindahl–Hirschman Index (HHI), and 5-bank
concentration ratio (CR5) are the market power indexes. SIZE is the logarithm of total assets. NIR refer to income diversification of banks measured by non-Interest revenue to total revenue. COST is the
ratio of operating expenses to total income. EQTA refers to the bank capitalization calculated as the ratio of total equity to total assets. LIQ refer to bank liquidity calculated by the ratio of total loans to
total assets. GDP is annual GDP growth rate. INF IS annual inflation rate. The standard errors are in parentheses. *** Significance at the 1% level, ** Significance at the 5% level, * Significance at the 10%
level.
Table 8
Estimation results of bank risk-taking behavior equation after the global financial crisis period (2010–2016).
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .402*** .528*** .029*** .029*** .040*** .045*** .039*** .047*** .762*** .945*** .268*** .313***
(.043) (.084) (.006) (.006) (.005) (.007) (.005) (.005) (.071) (.098) (.063) (.059)
Lerner index −.515** −3.977** −12.75***
(.256) (1.971) (2.347)
Boone indicator −51.17*** −6.875** −89.020**
(9.82) (2.21) (42.083)
HHI .013** .005** .009**
(.005) (.002) (.003)
CR5 .006*** .005** .009**
(.001) (.002) (.004)
SIZE −.8993*** −.538*** −.624*** −.468*** −3.324*** −3.11*** −3.894*** −2.717*** −3.532*** −5.191*** −3.065*** −1.821***
(.063) (.117) (.076) (.032) (.206) (.283) (.244) (.289) (.535) (.025) (.917) (.517)
NIR .054*** .037*** .058*** .054*** .184*** .061** .141*** .098*** .024** .025*** .081*** .085***
(.012) (.004) (.012) (.010) (.029) (.022) (.012) (.012) (.011) (.005) (.021) (.020)
COST .047** .244*** .018*** .006*** .053** .123*** .120*** .101*** .039** .077** .044** .076***
(.019) (.017) (.004) (.001) (.023) (.047) (.022) (.026) (.018) (.032) (.021) (.018)
EQTA −.175*** −.263*** −.134*** −.024*** −.698*** −.607*** −.735*** −.539*** −.564*** −.418*** −.171*** −.144**
(.054) (.052) (.037) (.006) (.067) (.074) (.044) (.043) (.057) (.076) (.050) (.060)
LIQ −.021** −.013*** −.024*** −.017*** −.019* −.022** −.018*** −.006 −.081*** −.014** −.033** −.073***(.013)
(.009) (.007) (.009) (.004) (.010) (.010) (.001) (.008) (.016) (.005) (.013)
23
GDP −.094*** −.051** −.0458*** −.039*** −.159*** −.177*** −.163*** −.0880*** −.0767** −.114** −.0859** −.0534*
(.021) (.021) (.012) (0.01) (.039) (.0344) (.0308) (.0199) (.0367) (.0479) (.0335) (.0316)
INF .034** .114** .0632* .050** .366** .494*** .180** .259** .0332*** .0271** .148* .0909**
(.011) (.0489) (.0326) (.021) (.165) (.138) (.0991) (.105) (.012) (.011) (.0794) (.0397)
Intercept 16.06*** 10.55*** 11.19*** 8.18*** 65.77*** 60.14*** 67.18*** 48.74*** 15.23* −23.42** 54.63*** 30.10***
(1.67) (1.861) (1.296) (.593) (7.073) (4.504) (3.714) (4.469) (8.151) (7.71) (16.33) (.022)
No. observations 420 420 420 420 420 420 420 420 420 420 420 420
No. banks 70 70 70 70 70 70 70 70 70 70 70 70
Wald-test 7759.7*** 6497.1*** 2017.2*** 3486.5*** 2070.2*** 2017.7*** 968.8*** 1432.8*** 2191*** 1840.1*** 1090.5*** 1070.7***
Sargan P value 0.5399 0.2556 0.1252 0.1373 0.6723 0.6837 0.3448 0.4314 0.2629 0.7683 0.3227 0.2139
AR(1) P value 0.0091 0.0011 0.0917 0.0520 0.0340 0.0681 0.0310 0.1008 0.0746 0.0420 0.0652 0.0354
AR(2) P value 0.3322 0.3156 0.2666 0.1938 0.7792 0.7692 0.2786 0.1627 0.1406 0.6664 0.2021 0.1736
LLP ZROA ZROE
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .495*** .499*** .374*** .434*** .278*** .141*** .158*** .146*** .487*** .485*** .370*** .513***
(.059) (.061) (.041) (.007) (.056) (.024) (.017) (.017) (.101) (.132) (.053) (.109)
Lerner index −6.676** 1.169*** 15.72**
(2.636) (.109) (5.28)
Boone indicator −12.956*** 9.127*** 39.82***
(.828) (2.907) (3.766)
Table 8 (continued)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
HHI .003** −.115** −.021***

(.001) (.056) (.004)

CR5 .003** −.072** −.695**
(.001) (.029) (.299)
SIZE .117 −.212 −2.325** .036 10.53** 11.626*** 3.831** 5.057** 5.989*** 5.679*** 5.693*** 8.395***
(1.033) (.829) (.966) (.259) (4.738) (3.065) (1.859) (2.504) (1.038) (1.464) (1.247) (2.751)
NIR .104*** .100*** .046*** .095*** −.468 −.481 −.621 −.656 −.017 −.091 −.010 −.094
(.013) (.020) (.010) (.015) (2.164) (1.451) (1.559) (1.137) (.076) (.098) (.111) (.100)
COST .049*** .031*** .032** .058*** −.332 −.0303 −1.237 −1.177 −.195 −.104 −.141 −.113
(.012) (.008) (.012) (.010) (1.228) (.908) (.860) (.781) (.210) (.109) (.098) (.111)
EQTA −.284*** −.389** −.165** −.300*** 3.654** 4.307*** 1.081** 6.336*** .432** .721*** .295** .691**
(.048) (.154) (.072) (.028) (1.520) (1.204) (.506) (1.818) (.208) (.169) (.144) (.266)
LIQ .004(.009) .003 003 .005 1.167** 1.262** 1.735*** 1.910** .275** .259** .314** .262**
(.005) (.004) (.004) (.528) (.512) (.506) (.365) (.112) (.127) (.182) (.104)
GDP −.0951** −.0478** −.0391** −.0387* .415** .698** .474* .359* 30.14* 2.811* 3.017* 1.039*
(.0453) (.0209) (.0150) (.0220) (.135) (.240) (.249) (.190) (15.56) (1.762) (1.637) (.720)
INF .0476*** .0583*** .0736** .118** −1.942*** −1.530*** −.929** −1.317* −6.851** −3.955** −5.983** −8.292**
(.013) (.016) (.0278) (.0550) (1.123) (1.031) (.453) (.754) (2.381) (1.714) (2.080) (3.909)
Intercept −10.43** 5.74** −2.64 4.786** −14.86** −16.94 −3.02 −6.83 −69.10** −79.15*** 78.63** −65.21*
24
(4.976) (2.72) (8.57) (1.453) (7.200) (6.984) (5.202) (4.140) (24.10) (22.25) (33.92) (33.12)
No. observations 420 420 420 420 420 420 420 420 420 420 420 420
No. banks 70 70 70 70 70 70 70 70 70 70 70 70
Wald-test 484.1*** 718.6*** 1626.7*** 2263.9*** 195.8*** 92.75*** 325*** 212.1*** 67.6*** 59.88*** 405.2*** 138.07***
Sargan P value 0.7808 0.8454 0.7337 0.1399 0.1673 0.1479 0.1259 0.1535 0.8257 0.6299 0.4122 0.5479
AR(1) P value 0.2984 0.2843 0.2903 0.2709 0.0010 0.0343 0.0320 0.0410 0.0411 0.0267 0.0141 0.0194
AR(2) P value 0.3038 0.3125 0.3182 0.3130 0.2731 0.1533 0.8788 0.9766 0.2299 0.3624 0.7275 0.5958
Note: Table reports estimation results for the impact of bank competition on bank risk-taking behavior in the post-global financial crisis period (2010–2016) using two-step system GMM dynamic panel
model by Arellano and Bover (1995). The dependent variables are the standard deviation of ROA (SDROA), Standard deviation of ROE (SDROE) calculated from a three-period based rolling window, non-
performing loans to total loans (NPL), loan loss provision to total loans (LLP), Z-score index based on ROA (ZROA), and Z-score index based on ROE. Lerner Index, Boone indicator, Herfindahl-Hirschman
Index (HHI), and 5-bank concentration ratio (CR5) are the market power indexes. SIZE is the logarithm of total assets. NIR refer to income diversification of banks measured by non-Interest revenue to
total revenue. COST is the ratio of operating expenses to total income. EQTA refers to the bank capitalization calculated as the ratio of total equity to total assets. LIQ refer to bank liquidity calculated by
the ratio of total loans to total assets. GDP is annual GDP growth rate. INF IS annual inflation rate. The Sargan test is the test for over-identifying restrictions in GMM estimation. AB test AR(1) and AR(2)
refer to the Arellano-Bond test that average autocovariance in residuals of order 1 resp. of order 2 is 0 (H0: no autocorrelation). The standard errors are in parentheses. *** Significance at the 1% level, **
Significance at the 5% level, * Significance at the 10% level.
entire period 1998 to 2016 including the period of global financial crisis.
Furthermore, Table 7 shows that, during the financial crisis period, non-interest revenue (NIR) has a negative impact on bank risk-
taking (SDROA, SDROE, NPL, and LLP) and a positive impact on bank stability (ZROA and ZROE). In contrast, loan total assets ratio
(LIQ) has a positive effect on bank risk and a negative impact on the bank stability. These suggest that during the financial crisis,
diversification into non-interest income bearing activities by banks in GCC has reduced instability in the banking system.
The coefficients of time dummy variables (2007, 2008 and 2009) in Table 7 are significantly positive with bank risk-taking
behavior but significantly negative with stability, suggesting that bank risk-taking behavior was higher during the financial crisis but
the stability was low.
5.3. Bank characteristics and competition
To examine the existence of any cross-sectional heterogeneity in the association between competition, concentration, risk, and
bank stability, we examine whether our results hold for too-big-to- fail banks, highly capitalized banks, and highly liquid banks. The
first posit is that a too-big-to-fail bank makes the effect of competition on bank risk and stability less important. It can be argued that
larger banks exist in several markets in different countries. They engage in nontraditional activities and tend to have higher profits,
less risky and are more stable. Higher capital requirements can also reduce agency cost between bank owners and depositors,
resulting in better performance (lower risk and higher stability). Apart from mandating the need for the capital of good quality and
capital buffers, capital buffers, Basel III introduces a new framework for liquidity standards to hedge liquidity risks that “establishes
minimum levels of liquidity for internationally active banks. Therefore, we divide the banks based on the level of liquidity to
determine whether the results hold for highly liquid banks. Notably, Khan et al. (2016) find that banks with individual characteristics
such as large size, high capitalization, and high liquidity respond differently to monetary policy shocks. For these reasons, in this
section, we analyze whether banks with individual characteristics like high liquidity, high capitalization, and large size may respond
differently to the market competition. To study these possibilities, we split the data into two subsamples based on liquidity, capi-
talization, and size. For each country in every year, we classify the banks as follow: banks with a value (capitalization, size, and
liquidity) higher than the country average are classified as high capitalization, large size, and high liquidity. While banks with a value
less than or equal to the country average are classified as low capitalization, small size, and low liquidity. We then investigate the
response of banks' stability and risk to changes in the bank characteristics in all the subsamples. The findings of these analyses are
recorded in Tables 9–14 and show that all GMM estimations are valid.
The coefficient on bank competition (Lerner index and Boone indicators) and market concentration (HHI and CR5) are significant
for all the bank categories but the signs are different. Tables 9 and 10 reports the results of banks with high and low capitalizations,
Tables 11 and 12 show the findings for banks with high and low liquidity, while the results for banks with large and small size are
reported in Tables 13 and 14 respectively.
Tables 9, 11 and 13 show that higher market power (higher Lerner index), lower competition (higher Boone indicator) and lower
concentration (HHI and CR5) in the banking market decrease the risk and enhance the stability of banks that are highly capitalized,
highly liquid and have a large size. These findings are similar to the results of the main estimation in Table 4. However, the findings in
the case of low capitalized, low liquid and small banks are the opposite as reported in Tables 10, 12 and 14.
Specifically, Lerner index and Boone indicator are positively related to bank risk-taking behavior (SDROA, SDROE, NPL, and LLP),
while they are negatively associated with bank stability (ZROA and ZROE). However, market concentration parameters (HHI and
CR5) are negatively related to bank risk-taking behavior and positively related to bank stability. These indicate that higher market
power, lower level of competition and lower concentration in the banking market increase the risk and decrease the stability of low
capitalized, low liquid, and small banks.
Such results could be due to the fact that, during a financial crisis, banks with low capitalization, low liquidity, and small size
could face a huge decline in their capital ratios which may prompt them to engage in imprudent lending decisions and hence the
moral hazard. Moreover, in a highly competitive market, banks with low capitalization, low liquidity, and small size may fade out. It
may be mentioned in this context that with the removal of restriction on foreign ownership and ease of entry of foreign banks in the
GCC economies over the last decade, low capitalized, low liquid and small size banks might have found it difficult to meet the
competitive challenges posed by foreign banks by virtue of their superior technology, better competency and experience, and stronger
capital base which has, in turn, affected the stability of this group. Wu, Chen, Jeon, and Wang (2017) in their study of domestic banks
in 35 emerging markets conclude that presence of foreign banks increases the risk profile of domestic banks.
However, in contrast to the large, highly capitalized, and highly liquid banks in GCC economies, non-interest revenue and cost-
income ratio of low capitalized, low liquid and small banks have negative association with Bank risk-taking behavior (SDROA,
SDROE, NPL, and LLP) and positive association with bank stability (ZROA and ZROE). These imply that the banks in this group have
been able to remain stable by not diversifying into non-interest revenue generating activities and by controlling cost. However, loan
to total assets ratio (LIQ) is found to be negatively related to the stability (ZROA and ZROE) of low capitalized, low liquid and small
banks. This indicates that banks in this group do not have sufficient capacity to manage and monitor the loans which result in
instability.
5.4. Robustness tests
To confirm the robustness of our results, we carry out several robustness checks. First, in order to check as to whether the study
results suffer from any sample bias, we rerun the analysis by excluding Bahrain banks (which accounts for 28% of the sample
25
Table 9
Estimation results of bank risk-taking behavior equation for banks with high capitalization (high equity to total assets)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .588*** .591*** .608*** .616*** .811*** .829*** .836*** .821*** −.493*** −.395*** −.214*** −.187***
(.008) (.007) (.007) (.008) (.006) (.005) (.005) (.006) (.023) (.009) (.013) (.004)
Lerner index −3.127*** −2.312*** −16.78***
(.453) (.409) (1.524)
Boone indicator −13.288*** −40.728*** −4.768***
(1.874) (7.477) (.380)
HHI .006*** .007*** .003**
(.001) (.001) (.001)
CR5 .008*** .071*** .164***
(.002) (.009) (.009)
SIZE −.396*** −.417*** −.332*** −.265*** −.922** −.885*** −1.687*** −1.279*** −2.801*** −2.574*** −3.518*** −2.309***
(.102) (.063) (.023) (.042) (.433) (.274) (.467) (.236) (.367) (.435) (.339) (.667)
NIR .009*** .009*** .006*** .014*** .052*** .059*** .067*** .055*** .019*** .021*** .043*** .039***
(.002) (.002) (.001) (.002) (.003) (.004) (.005) (.002) (.002) (.002) (.001) (.003)
COST .005*** .004*** .010*** .009*** .028*** .023*** .031*** .028*** .011*** .008*** .007*** .003***
(.0004) (.0004) (.0004) (.0005) (.001) (.002) (.002) (.002) (.0008) (.0007) (.001) (.0006)
EQTA −.038*** −.051*** −.052*** −.054*** −.037** −.050*** −.014*** −.042*** −.282*** −.323*** −.387*** −.325***
(.009) (.009) (.006) (.008) (.014) (.014) (.002) (.011) (.028) (.012) (.019) (.013)
LIQ −.017*** −.021*** −.026*** −.021*** −.057*** −.053*** −.046*** −.046*** −.002 −.006** −.030*** −.008**
(.004) (.002) (.001) (.004) (.011) (.008) (.011) (.007) (.003) (.003) (.003) (.003)
26
GDP −.0334*** −.0224*** −.0433*** −.0416*** −.283*** −.230*** −.354*** −.252*** −.0682*** −.0382*** −.184*** −.0798***
(.009) (.0039) (.009) (.00778) (.0204) (.0329) (.0251) (.0281) (.0113) (.00797) (.0222) (.0150)
INF .0538*** .0960*** .0531*** .0755*** .141*** .144*** .150*** .0575** .505*** .290*** .457*** .356***
(.019) (.0127) (.0160) (.0174) (.0409) (.0420) (.0453) (.0263) (.0225) (.0207) (.0227) (.0323)
Intercept 4.821*** 6.929*** 9.600** 6.879** −9.41 −10.14** −32.46*** −14.41*** 35.89*** 38.239*** 58.51*** 49.711***
(.779) (1.520) (3.753) (2.389) (7.52) (4.92) (9.14) (4.43) (6.99) (6.859) (4.56) (9.806)
No. observations 544 544 515 515 544 544 515 515 535 535 511 511
No. banks 37 37 37 37 37 37 37 37 37 37 37 37
Wald-test 830.5*** 1310*** 159.8*** 154.2*** 515.6*** 751.9*** 355.3*** 658.9*** 2370*** 133.7*** 60.7*** 41.9***
Sargan P value 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 0.1764
AR(1) P value 0.1233 0.1214 0.1209 0.1206 0.0929 0.0840 0.1019 0.0864 0.2530 0.2033 0.1619 0.4469
AR(2) P value 0.4307 0.3823 0.4706 0.4738 0.3894 0.3237 0.4232 0.3640 0.6993 0.5581 0.3643 0.1764
LLP ZROA ZROE
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .395*** .420*** .379*** .396*** .090** .072** .064*** .116*** .275*** .350*** .283*** .342***
(.007) (.014) (.007) (.012) (.038) (.027) (.013) (.034) (.006) (.002) (.002) (.002)
Lerner index −2.621** 49.72*** 14.984**
(1.186) (7.620) (6.672)
Boone indicator −37.651*** 92.51*** 98.17***
(9.417) (23.151) (16.741)
Table 9 (continued)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
HHI .004** −.444** −.032***

(.001) (.220) (.001)

CR5 .003* −2.514*** −.084***
(.001) (.506) (.015)
SIZE −.180** −.954*** −1.404*** −.361*** 39.752*** 23.337*** 30.998*** 23.580*** 3.511*** 1.005*** 1.265*** 1.173***
(.088) (.290) (.313) (.107) (13.231) (7.901) (1.264) (9.963) (.147) (.337) (.192) (.120)
NIR .046*** .025*** .046*** 049*** −.955*** −.555*** −.445*** −4.148*** −.013** −.047*** −.045*** −.041***
(.006) (.007) (.002) (.003) (.274) (.133) (.145) (.227) (.006) (.008) (.007) (.005)
COST .019*** .011*** .018*** .019*** −.044 −.040 −.084 −.0002 −.010 −.011 −.004 −.002
(.002) (.002) (.0007) (.005) (.113) (.119) (.066) (.082) (.006) (.006) (.003) (.008)
EQTA −.096*** −.078*** −.077*** −.090*** 2.662** 1.203* .190*** 3.147** .090** .030** .039*** .033***
(.010) (.012) (.006) (.007) (1.223) (.976) (.052) (1.637) (.042) (.013) (.010) (.008)
LIQ −.003 −.030** −.005** −.041*** .759** .693*** 1.107*** 1.195*** .015** .069*** .031*** .048***
(.003) (.011) (.002) (.013) (.300) (.225) (.209) (.182) (.007) (.011) (.006) (.005)
GDP −.0139 −.0313* −.0134* −0.000208 .0702*** .124*** .0592*** .120*** 5.573*** 5.402*** 5.132*** 5.498***
(.0153) (.0169) (.00692) (0.0147) (.0236) (.0265) (.0147) (.0390) (.296) (.455) (.239) (.144)
INF .0778*** .0229 .0015 .00733 −.543*** −.636*** −.533*** −.757*** −12.55*** −13.94*** −16.93*** −12.77***
(.0296) (.018) (.021) (.0193) (.0411) (.0606) (.0367) (.0654) (.422) (1.289) (1.045) (1.194)
Intercept 14.00** 33.27** 23.69** 61.85*** −302.40** −281.24** −198.34*** -414.52*** 28.39*** 22.239*** 27.638*** 26.19***
27
(5.04) (13.26) (11.22) (13.49) (105.10) (130.96) (24.98) (130.37) (2.38) (4.761) (3.193) (2.57)
No. observations 535 535 511 511 544 544 515 515 544 544 515 515
No. banks 37 37 37 37 37 37 37 37 37 37 37 37
Wald-test 22.8*** 13.9*** 25.6*** 27.9*** 17.2*** 133.4*** 428.2*** 36.1*** 59.2*** 150.3*** 885.7*** 864.1***
Sargan P value 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
AR(1) P value 0.0858 0.0880 0.1014 0.0999 0.0045 0.0030 0.0028 0.0044 0.1731 0.1529 0.1800 0.1333
AR(2) P value 0.6609 0.6887 0.6666 0.5663 0.3964 0.7033 0.3206 0.9095 0.6280 0.5693 0.6784 0.5903
Note: Table reports estimation results for the impact of bank competition on bank risk-taking behavior for banks with high capitalization using two-step system GMM dynamic panel model by Arellano
and Bover (1995). The dependent variables are the standard deviation of ROA (SDROA), Standard deviation of ROE (SDROE) calculated from a three-period based rolling window, non-performing loans to
total assets. GDP is annual GDP growth rate. INF IS annual inflation rate. The Sargan test is the test for over-identifying restrictions in GMM estimation. AB test AR(1) and AR(2) refer to the Arellano–Bond
level, * Significance at the 10% level.
Table 10
Estimation results of bank risk-taking behavior equation for banks with low capitalization (low equity to total assets)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .638*** .644*** .634*** .606*** .748*** .737*** .735*** .734*** .921*** .854*** .882*** .885***
(.010) (.009) (.010) (.013) (.001) (.001) (.001) (.001) (.022) (.016) (.009) (.008)
Lerner index 2.747*** 54.006***(5.239) 6.542***
(.118) (1.426)
Boone indicator 5.779*** 150.14*** 15.03***
(.682) (28.306) (4.334)
HHI −.001*** −.014*** −.003*
(.0001) (.003) (.001)
CR5 −.007*** −.378*** −.006*
(.001) (.010) (.003)
SIZE −.152*** −.144*** −.125*** −.183*** −3.283*** −4.700*** −3.707*** −5.415*** −.953*** −.218** −.417*** −.378***
(.019) (.018) (.019) (.019) (.622) (.728) (.716) (.742) (.282) (.111) (.072) (.107)
NIR −.003** −.003** −.004*** −.004*** −1.243*** −1.248*** −1.089*** −1.170*** −.075*** −.055*** −.065*** −.063***
(.001) (.001) (.001) (.001) (.036) (.024) (.034) (.029) (.005) (.004) (.003) (.002)
COST −.004*** −.0003 −.003** −.003** .−372*** −.180*** −.132*** −.123*** −.040*** −.057*** −.054*** −.060***
(.0007) (.0007) (.001) (.001) (.027) (.042) (.024) (.037) (.008) (.005) (.005) (.005)
EQTA −.036*** −.028*** −.028*** −.023*** −1.929*** −2.446*** −2.409*** −2.463*** −.091*** −.109*** −.090*** −.117***
(.003) (.003) (.003) (.003) (.180) (.191) (.1803) (.129) (.015) (.022) (.019) (.017)
LIQ −.001*** −.0008** −.005** .0005 −.091*** −.051** −.060*** −.054** −.010*** −.017*** −.008*** −.006**
(.0004) (.0003) (.0004) (.0004) (.016) (.022) (.018) (.023) (.003) (.003) (.002) (.001)
28
GDP −.0024* −.0050*** −.00381* −.0045*** −1.042*** −1.099*** −1.082*** −1.026*** −.214*** −.239*** −.229*** −.236***
(.0014) (.00147) (.0022) (.0018) (.0582) (.0438) (.0341) (.0532) (.00843) (.00712) (.0130) (.0111)
INF .0312*** .0334*** .0359*** .0284*** 2.305*** 2.249*** 2.189*** 1.959*** .152*** .0542*** .0463*** .0519***
(.0031) (.00219) (.00294) (.00357) (.0943) (.111) (.0894) (.129) (.0150) (.0149) (.0106) (.0066)
Intercept 2.560*** 1.988*** 1.599*** 2.983*** 164.01*** 154.46*** 137.47*** 186.46*** −9.84** −8.67*** −5.493*** −4.44***
(.254) (.289) (.269) (.277) (11.88) (14.19) (14.21) (13.73) (4.64) (2.104) (1.171) (1.64)
No. observations 449 449 482 482 449 449 482 482 466 466 499 499
No. banks 33 33 33 33 33 33 33 33 33 33 33 33
Wald-test 313.8*** 389.1*** 343.3*** 745.4*** 8080*** 17200*** 14700*** 4970*** 629.7*** 2093.7*** 800.2*** 635.3***
Sargan P value 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
AR(1) P value 0.0134 0.0116 0.0125 0.0117 0.3094 0.3047 0.3245 0.3040 0.0036 0.0021 0.0019 0.0017
AR(2) P value 0.4998 0.4056 0.6577 0.6663 0.3192 0.3239 0.3069 0.3227 0.9909 0.9612 0.9682 0.9032
LLP ZROA ZROE
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .372*** .376*** .882*** .389*** .237*** .130*** .147*** .142*** .203*** .310*** .301*** .288***
(.014) (.022) (.009) (.022) (.018) (.005) (.005) (.003) (.011) (.016) (.016) (.011)
Lerner index 2.687*** −49.98*** −45.69***
(.332) (7.017) (5.460)
Boone indicator 8.280*** −178.6*** −79.96***
(1.921) (12.322) (1.446)
Table 10 (continued)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
HHI −.003** .063*** .009***

(.001) (.015) (.002)

CR5 −.003** 2.500*** .669***
(.001) (.260) (.083)
SIZE −.171*** −.049** −.417*** −.086** 61.222*** 64.933*** 72.606*** 62.727*** 6.861*** 7.337*** 8.649*** 10.187***
(.040) (.024) (.072) (.042) (8.008) (15.862) (10.962) (10.257) (.565) (1.211) (.794) (.589)
NIR −.033*** −.029*** −.064*** −.031*** .792** .387** 1.452*** .912*** .288*** .184*** .066** .071**
(.002) (.002) (.003) (.002) (.378) (.166) (.122) (.150) (.031) (.027) (.032) (.034)
COST −.026*** −.023*** −.054*** −.017*** 5.395*** 3.683** 2.664** 1.591** .372** .089** .097** .166**
(.002) (.001) (.005) (.001) (.813) (.996) (.813) (.409) (.132) (.035) (.041) (.054)
EQTA −.094*** −.074*** −.090*** −.082*** 2.516 1.198 3.811 5.769 .304 .341 .392 .057
(.005) (.009) (.018) (.008) (3.058) (4.123) (4.272) (4.814) (.251) (.202) (.430) (.460)
LIQ −.005*** −.004*** −.008*** −.004*** −.363*** −.305** −.687*** −.574*** −.158*** −.157*** −.079*** −.068***
(.001) (.001) (.002) (.001) (.112) (.129) (.155) (.171) (.014) (.024) (.025) (.017)
GDP −.0419*** −.0301*** −.0350*** −.0327*** .266*** .156*** .0571 .0898*** 4.034*** 0.624 .746 2.957**
(.00418) (.00308) (.00453) (.00484) (.0300) (.0553) (.0795) (.0288) (.662) (.558) (1.027) (1.482)
INF .00452 .00686 .00948 .0181*** −.597*** −.860*** −1.115*** −.950*** −3.759*** −8.483*** −10.31*** −7.679***
(.00623) (.00551) (.00629) (.00292) (.0513) (.0900) (.162) (.132) (1.333) (1.065) (1.429) (1.792)
Intercept 5.946*** 4.279*** -5.493*** 4.88*** −109.2*** −99.69*** −115.6*** −98.88*** −102.4*** −94.66*** −122.5*** -6.09***
29
(.788) (1.051) (1.171) (.761) (20.25) (29.25) (18.19) (20.48) (8.809) (17.51) (15.65) (.716)
No. observations 466 466 499 499 449 449 482 482 449 449 482 482
No. banks 33 33 33 33 33 33 33 33 33 33 33 33
Wald-test 91.2*** 48.3*** 800.2*** 15.9*** 30.2*** 33.5*** 46.2*** 26.5*** 75.9*** 98.5*** 19.9*** 34.3***
Sargan P value 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
AR(1) P value 0.0124 0.0093 0.0019 0.0095 0.0403 0.0220 0.2191 0.2177 0.0123 0.0088 0.0149 0.0124
AR(2) P value 0.9810 0.8249 0.9682 0.9491 0.1850 0.1509 0.8539 0.8505 0.1085 0.2067 0.5059 0.4236
Note: Table reports estimation results for the impact of bank competition on bank risk-taking behavior for banks with low capitalization using two-step system GMM dynamic panel model by Arellano and
Bover (1995). The dependent variables are the standard deviation of ROA (SDROA), Standard deviation of ROE (SDROE) calculated from a three-period based rolling window, non-performing loans to
Table 11
Estimation results of bank risk-taking behavior equation for high liquidity banks (low loans to total assets)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .477*** .497*** .415*** .428*** .524*** .547*** .509*** .528*** −.134*** −.191*** −.103*** −.081***
(.004) (.005) (.012) (.011) (.008) (.006) (.011) (.006) (.016) (.009) (.030) (.028)
Lerner index −.992** −7.938*** −2.090***
(.457) (2.081) (.389)
Boone indicator −24.088*** −64.635*** −126.3***
(1.883) (3.715) (12.719)
HHI .0007*** .016*** .019**
(.0001) (.002) (.008)
CR5 .005*** .021** .028***
(.001) (.007) (.006)
SIZE −.860*** −.664*** −.787*** −.665*** −2.768*** −1.731*** −2.439*** −2.282*** −7.154*** −6.861*** −6.307*** −5.790***
(.026) (.047) (.108) (.078) (.189) (.204) (.367) (.163) (.261) (.423) (.519) (.323)
NIR .014*** .017*** .021*** .021*** .016*** .022*** .028*** .027*** .082*** .133*** .115*** .104***
(.001) (.001) (.001) (.001) (.004) (.003) (.003) (.002) (.010) (.015) (.007) (.008)
COST .013*** .008*** .013*** .013*** .033*** .024*** .035*** .034*** .032*** .010*** .034*** .039***
(.0003) (.0003) (.0003) (.0002) (.0009) (.001) (.001) (.001) (.002) (.002) (.002) (.003)
EQTA −.020*** −.00001 −.016*** −.021*** −.136*** −.117*** −.091*** −.121*** −.050*** −.106*** −.057*** −.059***
(.004) (.002) (.005) (.004) (.022) (.019) (.016) (.019) .017) (.024) (.021) (.016)
LIQ −.018*** −.013*** −.023*** −.025*** −.072*** −.046*** −.047*** −.054*** −.059*** −.053*** −.069*** −.061***
(.001) (.0009) (.002) (.002) (.007) (.008) (.003) (.005) (.014) (.007) (.012) (.011)
30
GDP −.0317*** −.000428 −.0598*** −.0525*** −.258*** −0.117*** −.299*** −.297*** −.180*** −.141*** −.159*** −.181***
(.00542) (.00660) (.00957) (.00826) 0.0356) (0.0269) (0.0543) (.0250) (.0382) (.0275) (.0338) (.0377)
INF .0694*** .112*** .0989*** .118*** .438*** .346*** .291*** .354*** .230*** .224*** .247*** .330***
(.0166) (.0117) (.0124) (.0108) (.0612) (.0389) (.0435) (.0389) (.0566) (.0230) (.0610) (.0386)
Intercept 13.627*** 10.88*** 12.29*** 9.99*** 41.28*** 28.52*** 39.43*** 34.51*** 119.11*** 117.93*** 106.61*** 95.51***
(.504) (.667) (1.73) (1.20) (3.225) (3.29) (5.54) (2.17) (4.74) (6.793) (8.414) (5.370)
No. observations 590 594 594 604 590 594 594 604 585 590 590 603
No. banks 42 42 42 42 42 42 42 42 42 42 42 42
Wald-test 5505.7*** 6648.1*** 977.5*** 613.2 45300*** 557.7*** 1896.5*** 1945.4*** 736.1*** 1781.1*** 384.4*** 926.9***
Sargan P value 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
AR(1) P value 0.2474 0.2401 0.2430 0.2298 0.1731 0.1598 0.1806 0.1665 0.1710 0.1451 0.1516 0.1489
AR(2) P value 0.5331 0.4623 0.5790 0.5812 0.3510 0.3118 0.4000 0.3658 0.2657 0.2802 0.2261 0.2585
LLP ZROA ZROE
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .248*** .261*** .257*** .260*** .151*** .250*** .252*** .274*** .317*** .388*** .489*** .583***
(.004) (.007) (.003) (.001) (.009) (.024) (.005) (.008) (.015) (.020) (.026) (.076)
Lerner index −8.358*** 41.43*** 14.751**
(1.905) (6.85) (5.303)
Boone indicator −26.768*** 96.33*** 73.21***
(5.137) (2.506) (12.587)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
HHI .004*** −.063** −126***

(.001) (.027) (.002)

CR5 .019*** −.168*** −.717***
(.001) (.020) (.150)
SIZE −1.032*** −.946*** −1.009*** −.822*** 78.345*** 32.702*** 26.817*** 24.124*** 2.739*** 1.839*** 3.490*** 8.909***
(.255) (.094) (.074) (.111) (17.247) (8.576) (1.506) (1.997) (.643) (.543) (.844) (2.691)
NIR .051*** .056*** .054*** .053*** −.993*** −.694*** −.408** −.507** −.023*** −.027* −.057* −.055***
(.003) (.002) (.001) (.002) (.299) (.198) (.200) (.200) (.005) (.015) (.029) (.019)
COST .032*** .024*** .028*** .029*** −.180 −.056 −.025 −.0007 −.008** −.016*** −.010 −.006
(.001) (.001) (.0002) (.0004) (.117) (.061) (.126) (.152) (.004) (.005) (.038) (.021)
EQTA −.071*** −.116*** −.101*** −.083*** 8.648** 1.115** .828*** 1.556*** .024 .065 .107 .032
(.017) (.007) (.006) (.007) (4.132) (.542) (.242) (.213) (.055) (.053) (.098) (.240)
LIQ −.011*** −.009*** −.009*** −.006* .323*** .376*** .508*** .338*** .057*** .038*** .119*** .120***
(.003) (.003) (.002) (.003) (.108) (.072) (.046) (.075) (.012) (.009) (.009) (.017)
GDP −.0211 −.0786*** −.0485*** −.0433** .0851 .0392 .435*** .445*** .140 3.222 3.155** 1.172
(.0381) (.0232) (.0176) (.0211) (.0562) (.0718) (.0546) (.0669) (1.650) (1.985) (1.299) (1.515)
INF .187*** .0352* .0494*** .0761*** −.242* −.433*** −.786*** −.0544 −7.460** −12.01*** −9.327*** −12.90***
(.0646) (.0194) (.0176) (.0158) (.141) (.0701) (.0892) (.195) (3.216) (1.121) (2.442) (1.125)
Intercept 6.561 18.554*** 18.478*** 16.476*** −96.25** −27.87* −330.48*** −307.29*** −42.41*** −21.97*** −63.62*** −184.3***
31
(4.589) (1.406) (1.087) (1.655) (31.40) (13.91) (25.02) (40.190) (9.426) (8.235) (14.503) (40.04)
No. observations 598 602 602 614 590 594 594 604 591 595 594 605
No. banks 42 42 42 42 42 42 42 42 42 42 42 42
Wald-test 861.6*** 1910*** 559.1*** 1050*** 1596.6*** 870.7*** 411.8*** 505.4*** 584.3*** 501.1*** 1559.5*** 396.1***
Sargan P value 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
AR(1) P value 0.1097 0.1099 0.1095 0.1163 0.0218 0.0224 0.0106 0.0098 0.0333 0.0345 0.1804 0.2097
AR(2) P value 0.5669 0.6411 0.6292 0.5556 0.1493 0.1636 0.2735 0.2725 0.9661 0.8445 0.7037 0.2336
Note: Table reports estimation results for the impact of bank competition on bank risk-taking behavior for high banks liquidity using two-step system GMM dynamic panel model by Arellano and Bover
(1995). The dependent variables are the standard deviation of ROA (SDROA), Standard deviation of ROE (SDROE) calculated from a three-period based rolling window, non-performing loans to total
Table 12
Estimation results of bank risk-taking behavior equation for low liquidity banks (high loans to total assets).
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .810*** .808*** .802*** .805*** .744*** .739*** .745*** .735*** .747*** .709*** .644*** .674***
(.002) (.002) (.003) (.003) (.0003) (.0004) (.0002) (.0003) (.002) (.003) (.002) (.001)
Lerner index 1.807*** 29.895*** 2.187***
(.110) (2.004) (.396)
Boone indicator 1.649*** 57.413*** 52.484***
(.678) (11.311) (2.042)
HHI −.003** −.010*** −.0016***
(.001) (.001) (.0005)
CR5 −.006*** −.183*** −.021***
(.001) (.005) (.001)
SIZE −.029** −.096*** −.105*** −.101*** −2.544*** −3.646*** −2.413*** −3.744*** −.588*** −1.114*** −1.258*** −1.192***
(.013) (.019) (.030) (.021) (.266) (.361) (.478) (.308) (.064) (.056) (.086) (.063)
NIR −.002* −.002*** −.003** −.002** −1.205*** −1.223*** −1.471*** −1.099*** −.046*** −.017*** −.056*** −.055***
(.001) (.0007) (.001) (.001) (.015) (.009) (.023) (.007) (.001) (.004) (.002) (.001)
COST −.008*** −.007*** −.002** −.004*** −.086*** −.090*** −.061** −.134*** −.027*** −.023*** −.087*** −.032***
(.0007) (.001) (.001) (.001) (.012) (.013) (.026) (.011) (.002) (.003) (.003) (.001)
EQTA −.024*** −.023*** −.039*** −.022*** −.444*** −.468*** −.822*** −.453*** −.120*** −.010*** −.180*** −.143***
(.002) (.002) (.003) (.003) (.048) (.038) (.042) (.037) (.006) (.006) (.004) (.005)
LIQ −.015*** −.013*** −.011*** −.013*** −.049*** −.080*** −.057*** −.049*** −.023*** −.022*** −.028*** −.028***
(.001) (.001) (.001) (.001) (.016) (.014) (.014) (.013) (.001) (.003) (.002) (.001)
32
GDP −.0523*** −.0481*** −.0589*** −.0511*** −1.479*** −1.359*** −1.507*** −1.338*** −.116*** −.105*** −.148*** −.132***
(.00247) (.00314) (.00301) (.00267) (.0176) (.0320) (.0339) (.0240) (.0035) (.0037) (.00365) (.00410)
INF .0744*** .0645*** .0632*** .0551*** 1.189*** 2.053*** 2.342*** 1.778*** .275*** .142*** .122*** .178***
(.00392) (.00324) (.00451) (.00414) (.0450) (.0621) (.0973) (.0763) (.011) (.0116) (.00722) (.0068)
Intercept .490** −.050** −.241*** .076** 99.515*** 104.28*** 101.96*** 109.81*** 14.99*** 22.319*** 24.194*** 23.662***
(.247) (.027) (.451) (.038) (4.186) (5.84) (7.835) (4.80) (1.220) (1.309) (1.479) (.953)
No. observations 403 399 404 393 403 399 404 393 417 412 420 408
No. banks 28 28 28 28 28 28 28 28 28 28 28 28
Wald-test 3660*** 481.8*** 237.7*** 2160*** 2420*** 16400*** 5040*** 23800*** 2040*** 1830*** 1430*** 1850***
Sargan P value 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
AR(1) P value 0.2424 0.2448 0.2586 0.2451 0.2980 0.2988 0.2920 0.2991 0.0421 0.0246 0.0376 0.0317
AR(2) P value 0.2412 0.1925 0.3329 0.2270 0.3162 0.3242 0.3289 0.3202 0.7790 0.6539 0.9227 0.9676
LLP ZROA ZROE
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .757*** .743*** .770*** .763*** .067*** .076*** .091*** .092*** .299*** .377*** .319*** .345***
(.003) (.005) (.002) (.003) (.008) (.003) (.001) (.001) (.003) (.005) (.004) (.004)
Lerner index 2.196*** −40.92*** −50.108***
(.334) (3.275) (2.623)
Boone indicator 23.521*** −74.39*** −135.55***
(2.592) (16.782) (8.052)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
HHI −.0007*** .084*** .006***

(.0001) (.005) (.001)

CR5 −.011*** 2.303*** .128***
(.002) (.295) (.030)
SIZE −.016*** −.045*** −.033*** −.158*** 48.721*** 51.648*** 59.367*** 46.521*** 1.040*** 1.242*** 2.781*** 2.441***
(.007) (.003) (.003) (.039) (5.133) (3.783) (5.089) (7.077) (.299) (.452) (.424) (.430)
NIR −.020*** −.011*** −.024*** −.018*** 2.001*** 1.201*** .785** 1.301*** .155*** .075** .158*** .056**
(.003) (.003) (.003) (.002) (.264) (.211) (.328) (.298) (.020) (.030) (.038) (.020)
COST −.013*** −.016*** −.046*** −.012*** .364* .641*** .845** .688*** .062*** .050 .110*** .096**
(.001) (.001) (.002) (.0009) (.193) (.058) (.396) (.131) (.026) (.042) (.031) (.045)
EQTA −.048*** −.056*** −.037*** −.038*** 2.745*** 3.727*** 4.424*** .622 .222*** .263*** .260*** .199***
(.012) (.013) (.007) (.006) (.810) (.599) (.952) (1.457) (.042) (.039) (.057) (.036)
LIQ −.028*** −.020*** −.024*** −.023*** −1.746*** −1.602*** −1.941*** −1.961*** −.155*** −.132*** −.156*** −.142***
(.001) (.002) (.001) (.001) (.129) (.135) (.216) (.238) (.012) (.016) (.028) (.020)
GDP −.0813*** −.0574*** −.0969*** −.0912*** .222*** .222*** .0993*** .137*** 0.444 .0840 .175 .261
(.00912) (.00710) (.00553) (.00506) (.0205) (.0379) (.0205) (.0386) (.355) (.503) (.735) (.343)
INF .0511*** .0746*** .0674*** .0565*** −.273*** −.791*** −.634*** −.853*** −3.958*** −7.106*** −8.406*** −7.150***
(.0072) (.00689) (.00843) (.00549) (.0573) (.0448) (.0673) (.0472) (.729) (.851) (.699) (.890)
Intercept 2.930** 2.514*** 2.879*** −1.309** −750.18*** −650.30*** −804.61*** −641.5*** −3.81* −.678*** −19.48*** -20.716**
33
(1.188) (.713) (.576) (.621) (96.86) (74.84) (95.35) (146.72) (1.67) (8.40) (9.495) (9.784)
No. observations 404 400 409 396 403 399 404 393 403 399 403 393
No. banks 28 28 28 28 28 28 28 28 28 28 28 28
Wald-test 554.3*** 177.1*** 1050*** 90.5*** 229.8*** 255.1*** 244.7*** 240.4*** 208.8*** 305.1*** 242.8*** 227.4***
Sargan P value 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
AR(1) P value 0.0811 0.0951 0.0829 0.0774 0.0695 0.2300 0.2228 0.2232 0.0241 0.0126 0.0081 0.0056
AR(2) P value 0.2600 0.2456 0.3248 0.2751 0.1768 0.1287 0.1116 0.1612 0.6036 0.8540 0.8411 0.7443
Note: Table reports estimation results for the impact of bank competition on bank risk-taking behavior for low banks liquidity using two-step system GMM dynamic panel model by Arellano and Bover
Table 13
Estimation results of bank risk-taking behavior equation for large size banks.
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .640*** .639*** .634*** .636*** .737*** .733*** .730*** .731*** .884*** .831*** .844*** .877***
(.008) (.008) (.012) (.005) .001) (.001) (.0007) (.001) (.009) (.005) (.006) (.014)
Lerner index −.315** −28.123*** −6.674***
(.128) (4.215) (.655)
Boone indicator −.601*** −93.71*** −8.890***
(.134) (7.180) (1.182)
HHI .0003*** .011*** .0013*
(.0001) (.001) (.0007)
CR5 .004*** .217*** .021***
(.0007) (.011) (.003)
SIZE −.055*** −.057*** −.058** −.059*** −3.168** −1.331 −1.706** −1.773* −1.025*** −.443*** −.546*** −.742***
(.014) (.018) (.023) (.015) (.924) (1.247) (.851) (.926) (.129) (.052) (.066) (.090)
NIR .005*** .006*** .007*** .006*** 1.345*** 1.405*** 1.381*** 1.267*** .049*** .041*** .044*** .035***
(.0004) (.0009) (.001) (.0007) (.028) (.032) (.031) (.034) (.005) (.004) (.004) (.004)
COST .007*** .007*** .005*** .005*** .203*** .487*** .152*** .371*** .010 .015* .016*** .017**
(.001) (.001) (.001) (.001) (.069) (.060) (.056) (.061) (.008) (.008) (.006) (.005)
EQTA −.012** −.032*** −.00003 −.006*** −2.634*** −2.713** −2.620*** −2.510*** −.126*** −.132*** −.124*** −.121***
(.005) (.006) (.004) (.001) (.197) (.179) (.200) (.151) (.018) (.010) (.016) (.013)
LIQ −.0009* −.0010** −.0007* −.0004 −.082*** −.058*** −.035*** −.058*** −.008*** −.006*** −.007*** −.005***
(.0004) (.0004) (.0003) (.0003) (.028) (.028) (.016) (.020) (.001) (.001) (.002) (.001)
34
GDP −.0154*** −.0121*** −.0117*** −.0122*** −1.210*** −1.198*** −.987*** −1.107*** −.187*** −.194*** −.190*** −.192***
(.00161) (.00179) (.00186) (.00163) (.0583) (.0630) (.0545) (.0608) (.0140) (.00893) (.0133) (.00842)
INF .0423*** .0325*** .0351*** .0331*** 2.462*** 2.352*** 2.242*** 2.234*** .171*** .0583*** .0422*** .0422***
(.00316) (.00352) (.00323) (.00306) (.191) (.120) (.219) (.130) (.00987) (.00925) (.00954) (.00908)
Intercept .779*** 1.024*** 1.157*** 1.338*** 92.265*** 84.732*** 105.56*** 105.44*** −9.42*** −3.92*** −6.17*** −10.68***
(.260) (.353) (.321) (.295) (18.335) (22.328) (15.670) (17.25) (2.27) (.79) (1.30) (1.75)
No. observations 555 562 578 568 555 562 578 568 572 580 598 589
No. banks 38 38 38 38 38 38 38 38 38 38 38 38
Wald-test 444.4*** 194.5*** 240.7*** 407.2*** 22600*** 9190*** 9810*** 3910*** 397.1*** 2465.9*** 862.2*** 1115.6***
Sargan P value 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
AR(1) P value 0.0176 0.0152 0.0135 0.0113 0.2994 0.2940 0.3025 0.2982 0.0075 0.0047 0.0039 0.3517
AR(2) P value 0.1287 0.1160 0.1150 0.1149 0.3175 0.3136 0.3302 0.3241 0.4648 0.4634 0.4038 0.4016
LLP ZROA ZROE
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .369*** .353*** .396*** .384 .155*** .108*** .122*** .127*** .392*** .376*** .319*** .330***
(.023) (.018) (.013) (.012) (.010) (.004) (.003) (.003) (.008) (.011) (.015) (.032)
Lerner index −1.721*** 126.51*** 27.81***
(.202) (9.449) (4.702)
Boone indicator −8.706*** 197.52** 126.2***
(1.425) (24.957) (9.629)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
HHI .0003** −.031* −.003**

(.0001) (.016) (.001)

CR5 .010*** −.650** −.744***
(.001) (.257) (.095)
SIZE −.057 −.017 −.071 .008 36.152*** 37.668*** 52.736*** 51.120*** 6.168*** 7.721*** 8.596*** 7.036***
(.045) (.043) (.044) (.031) (.506) (9.030) (18.298) (7.910) (.285) (1.417) (1.001) (1.047)
NIR .027*** .019*** .023*** .019*** −1.430*** −.925*** −1.002*** −1.599*** −.251*** −.096** −.126*** −.143**
(.002) (.002) (.002) (.003) (.279) (.208) (.298) (.272) (.023) (.040) (.039) (.051)
COST −.005 −.004 .0003 −.003 −4.085*** −3.627*** −3.820*** −4.061*** −.186*** −.099 −.260*** −.121*
(.005) (.003) (.004) (.002) (.416) (.697) (.732) (.445) (.039) (.063) (.079) (.066)
EQTA −.075*** −.058*** −.062*** −.055*** 3.953* 5.282** 5.456*** 2.928* .513*** .967*** 1.158*** −.084
(.009) (.008) (.007) (.009) (1.999) (2.518) (1.658) (1.746) (.147) (.146) (.138) (.154)
LIQ −.0022*** −.001 −.002** −.0018** .968*** .884*** .841*** .751*** .151*** .195*** .151*** .135***
(.0008) (.001) (.0008) (.0008) (.098) (.088) (.116) (.089) (.016) (.020) (.017) (.025)
GDP −.0461*** −.0309*** −.0394*** −.0366*** .108*** .145*** .0913** .0590 .319 .626*** 2.218* 2.365***
(.00533) (.00291) (.00411) (.00469) (.0322) (.0387) (.0418) (.0432) (.438) (.219) (1.318) (.709)
INF .00475 .00196 .00397 .000677 −.371*** −.569*** −.968*** −.362*** −8.075*** −11.55*** −11.30*** −11.61***
(.00700) (.00531) (.00856) (.00714) (.0884) (.148) (.0948) (.138) (1.007) (.967) (1.000) (.802)
Intercept 1.353** 2.475*** .782 1.168*** −785.32*** −590.43*** −895.78*** −797.37*** −89.34*** −110.5*** −129.7*** −144.7***
35
(.628) (.742) (.608) (.397) (112.42) (209.10) (313.050) (148.182) (5.026) (24.069) (18.57) (17.05)
No. observations 559 566 584 574 555 562 578 568 556 563 578 569
No. banks 38 38 38 38 38 38 38 38 38 38 38 38
Wald-test 489.1*** 715.7*** 133.6*** 6596.5*** 316.4*** 429.9*** 1170.8*** 859.1*** 5037.8*** 608.2*** 566.87 113.8***
Sargan P value 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
AR(1) P value 0.0111 0.0110 0.0090 0.0106 0.0154 0.2052 0.2010 0.2034 0.0109 0.0094 0.0172 0.0149
AR(2) P value 0.2303 0.3248 0.2396 0.2626 0.1992 0.3359 0.3336 0.3886 0.1122 0.1288 0.3776 0.3727
Note: Table reports estimation results for the impact of bank competition on bank risk-taking behavior for large size banks using two-step system GMM dynamic panel model by Arellano and Bover (1995).
The dependent variables are the standard deviation of ROA (SDROA), Standard deviation of ROE (SDROE) calculated from a three-period based rolling window, non-performing loans to total loans (NPL),
loan loss provision to total loans (LLP), Z-score index based on ROA (ZROA), and Z-score index based on ROE. Lerner Index, Boone indicator, Herfindahl–Hirschman Index (HHI), and 5-bank con-
centration ratio (CR5) are the market power indexes. SIZE is the logarithm of total assets. NIR refer to income diversification of banks measured by non-Interest revenue to total revenue. COST is the ratio
of operating expenses to total income. EQTA refers to the bank capitalization calculated as the ratio of total equity to total assets. LIQ refer to bank liquidity calculated by the ratio of total loans to total
assets. GDP is annual GDP growth rate. INF IS annual inflation rate. The Sargan test is the test for over-identifying restrictions in GMM estimation. AB test AR(1) and AR(2) refer to the Arellano–Bond test
that average autocovariance in residuals of order 1 resp. of order 2 is 0 (H0: no autocorrelation). The standard errors are in parentheses. *** Significance at the 1% level, ** Significance at the 5% level, *
Significance at the 10% level.
Table 14
Estimation results of bank risk-taking behavior equation for small size banks
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .618*** .622*** .579*** .587*** .867*** .866*** .851*** .847*** .218*** .130*** .139*** .203***
(.007) (.006) (.007) (.006) (.007) (.008) (.006) (.007) (.013) (.017) (.010) (.014)
Lerner index 2.601*** 3.671*** 9.848***
(.596) (.350) (1.245)
Boone indicator 10.578*** 50.856*** 156.8***
(2.325) (12.641) (9.171)
HHI −.005*** −.069** −.029**
(.001) (.032) (.010)
CR5 −.020*** −.039*** −.021**
(.002) (.009) (.007)
SIZE −.871*** −.772*** −.568*** −.812 −1.850*** −1.497*** −1.580*** −1.247*** −6.730*** −7.196*** −7.570*** −6.283***
(.087) (.069) (.037) (.054) (.167) (.368) (.352) (.355) (.270) (.298) (.394) (.380)
NIR −.021*** −.020*** −.014*** −.015*** −.041*** −.029*** −.036*** −.029*** −.037*** −.086*** −.029*** −.048***
(.003) (.001) (.002) (.001) (.004) (004) (.004) (.005) (.007) (.008) (.004) (.003)
COST −.012*** −.010*** −.014*** −.012*** −.035*** −.024*** −.043*** −.043*** −.019*** −.014*** −.020*** −.026***
(.0008) (.0007) (.001) (.001) (.002) (.003) (.002) (.002) (.001) (.002) (.001) (.001)
EQTA −.078*** −.080*** −.063*** −.067*** −.092*** −.161*** −.109*** −.107*** −.267*** −.266*** −.307*** −.248***
(.008) (.005) (.008) (.007) (.016) (.023) (.019) (.012) (.006) (.036) (.016) (.014)
LIQ −.038*** −.030*** −.051*** −.039*** −.069*** −.095*** −.096*** −.113*** −.127*** −.093*** −.126*** −.143***
(.005) (.003) (.003) (.003) (.022) (.006) (.011) (.006) (.018) (.011) (.033) (.010)
36
GDP −.0379*** −.0329*** −.0573*** −.0420*** −.132*** −.151*** −.204*** −.184*** −.0271** −.0109 −.0707*** −.0660***
(.00576) (.00467) (.00649) (.00638) (.0329) (.0311) (.0210) (.0280) (.0127) (.0136) (.0178) (.0186)
INF .0527*** .102*** .0847*** .0691*** .0198 .103*** .0492* .0269 .633*** .332*** .416*** .395***
(.0181) (.0106) (.0166) (.0138) (.0528) (.0199) (.0257) (.0334) (.0329) (.0230) (.0464) (.0360)
Intercept 14.244*** 13.937*** 11.73*** 16.02*** 31.36*** 32.04*** 31.525*** 28.884*** 121.04*** 124.83*** 132.14*** 109.03***
(1.404) (1.007) (.511) (.690) (2.24) (5.34) (4.912) (5.509) (4.40) (5.81) (6.438) (6.554)
No. observations 438 431 420 429 438 431 420 429 430 422 412 422
No. banks 32 32 32 32 32 32 32 32 32 32 32 32
Wald-test 2123.3*** 7699.1*** 4723.2*** 3944.7*** 290.85*** 11700*** 4841.6*** 1314.8*** 1484.4*** 3424.4*** 934.5*** 563.6***
Sargan P value 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
AR(1) P value 0.1164 0.1133 0.5645 0.1114 0.0818 0.0598 0.0714 0.0718 0.1345 0.1108 0.1400 0.1339
AR(2) P value 0.5653 0.4722 0.1059 0.5375 0.4386 0.3907 0.5979 0.5912 0.3095 0.4302 0.2492 0.3241
LLP ZROA ZROE
1 2 3 4 1 2 3 4 1 2 3 4
Lag t-1 .351*** .352*** .366*** .371*** .060*** .065*** .073*** .097*** .217*** .241*** .244*** .261***
(.004) (.005) (.004) (.005) (.008) (.013) (.006) (.011) (.012) (.003) (.002) (.004)
Lerner index 2.888*** −86.36*** −38.48***
(.687) (3.675) (1.907)
Boone indicator 26.361*** −66.83*** −71.33***
(1.692) (12.44) (17.950)
SDROA SDROE NPL
1 2 3 4 1 2 3 4 1 2 3 4
HHI −.020*** .443*** .252***

(.003) (.078) (.015)

CR5 −.013*** 3.197*** .120***
(.003) (.270) (.029)
SIZE −.588** −.726*** −.428*** −.698*** 22.402*** 57.302*** 24.932*** 32.192*** 3.698*** 2.227*** 4.559*** 1.909***
(.248) (.127) (.113) (.131) (6.529) (9.285) (3.706) (3.873) (.557) (.162) (.382) (.353)
NIR −.047*** −.049*** −.048*** −.045*** .101** .143 .169*** .235*** .042*** .015 .014** .025***
(.004) (.001) (.003) (.001) (.049) (.179) (.027) (.085) (.007) (.015) (.005) (.006)
COST −.029*** −.024*** −.032*** −.030*** .164** .119** .121 .138*** .019** .014** .019*** .005
(.001) (.001) (.001) (.001) (.058) (.056) (.093) (.033) (.005) (.005) (.005) (.003)
EQTA −.087*** −.095*** −.085*** −.074*** 2.479** 2.101*** .121 .882*** .097** .012 .244*** .091***
(.005) (.003) (.002) (.003) (.912) (.725) (.099) (.203) (.039) (.026) (.037) (.021)
LIQ −.027*** −.017*** −.032*** −.020*** −.258*** −.056 −.796*** −.796*** −.149*** −.131*** −.076*** −.078***
(.004) (.003) (.003) (.003) (.063) (.094) (.101) (.065) (.008) (.009) (.009) (.007)
GDP −.00489 −.0136 −.0135*** −.00165 .0214 .00904 .242*** .0664** 1.833*** 1.872*** .508 1.717***
(.00898) (.0105) (.00338) (.00469) (.0358) (.0257) (.0366) (.0309) (.204) (.248) (.676) (.223)
INF .0246 .0283*** .00962 .00635 −.267*** −.701*** −.863*** −.863*** −7.657*** −8.433*** −11.43*** −8.653***
(.0195) (.00792) (.0101) (.00932) (.0681) (.0345) (.0635) (.117) (.423) (.593) (.688) (.606)
Intercept 14.38*** 15.37*** 10.34*** 13.082*** −403.99*** −188.26 −248.28*** −560.04*** 36.387*** 34.402*** 79.87*** 41.06***
37
(3.38) (1.66) (1.80) (1.749) (101.60) (150.28) (58.99) (60.18) (8.619) (2.319) (5.86) (3.93)
No. observations 443 436 427 436 438 431 420 429 438 431 419 429
No. banks 32 32 32 32 32 32 32 32 32 32 32 32
Wald-test 1030.3*** 218.6*** 1974.9*** 477.0*** 162.9*** 332.02 1320*** 1279.7*** 2379*** 525.5*** 2208.4*** 1547.9***
Sargan P value 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
AR(1) P value 0.0812 0.0802 0.0763 0.0878 0.0148 0.0143 0.0096 0.0033 0.1237 0.1156 0.1259 0.1100
AR(2) P value 0.4883 0.5170 0.4773 0.4491 0.1066 0.1054 0.2464 0.1827 0.4578 0.2895 0.3937 0.3228
Note: Table reports estimation results for the impact of bank competition on bank risk-taking behavior for small size banks using two-step system GMM dynamic panel model by Arellano and Bover
Table 15
Estimation results of bank risk-taking behavior equation with the whole sample period (1998-2016): Controlling for the ownership variables,
regulation variables, environmental variables and interaction terms
Dependent variable: Bank risk-taking behavior (SDROA)
Panel A Panel B
(1) (2) (3) (4) (5) (6) (7) (8)
L.SDROAt-1 0.622*** 0.626*** 0.593*** 0.596*** 0.639*** 0.638*** 0.608*** 0.623***

(0.00116) (0.00151) (0.00190) (0.00173) (0.00258) (0.00149) (0.00196) (0.00195)
Lerner index (L) −0.456** −0.527**
(0.225) (0.221)
Boon indicator (L) −14.93*** −16.39***
(0.311) (0.537)
HHI (L) 0.00181*** −0.00879*-
**
(0.000111) (0.00114)
CR5 (L) 0.0168*** 0.0122***
(0.000883) (0.00121)
SIZE −0.184*** −0.131*** −0.0340* −0.0879*** −0.167*** −0.165*** −0.173*** −0.167***
(0.0137) (0.0171) (0.0175) (0.0191) (0.0303) (0.0251) (0.0340) (0.0351)
NIR 0.00790*** 0.00825*** 0.0115*** 0.0102*** 0.0077*** 0.0082*** 0.0103*** 0.0087***
(0.000268) (0.000312) (0.000387) (0.000522) (0.000397) (0.000371) (0.000406) (0.000580)
COST 0.0144*** 0.0116*** 0.0144*** 0.0143*** 0.0134*** 0.0106*** 0.0150*** 0.0138***
(0.000121) (0.000167) (0.000150) (0.000236) (0.000163) (0.000262) (0.000156) (0.000281)
EQTA −0.0539*** −0.0486*** −0.0623*** −0.0552*** −0.0488*** −0.0471*** −0.0594*** −0.0486***
(0.00149) (0.000933) (0.00168) (0.00167) (0.00181) (0.00195) (0.00177) (0.00274)
LNTA −0.0123*** −0.00977*- −0.0168*** −0.0150*** −0.0109*** −0.0081*** −0.0159*** −0.0136***
**
(0.000696) (0.000599) (0.000788) (0.000844) (0.000730) (0.000662) (0.000730) (0.000806)
GDP −0.0671*** −0.0563*** −0.0733*** −0.0643*** −0.0657*** −0.0578*** −0.0807*** −0.0741***
(0.00291) (0.00190) (0.00302) (0.00311) (0.00345) (0.00311) (0.00384) (0.00396)
INF 0.0768*** 0.0857*** 0.0746*** 0.0727*** 0.0671*** 0.0697*** 0.0717*** 0.0639***
(0.00390) (0.00252) (0.00383) (0.00310) (0.00527) (0.00568) (0.00479) (0.00499)
FOREIGN 0.0660*** 0.0593*** 0.0712*** 0.0683*** 0.0746*** 0.0771*** 0.0925*** 0.0844***
(0.000815) (0.00111) (0.000909) (0.00110) (0.00212) (0.00160) (0.00298) (0.00280)
GOVERNMENT −0.0209*** −0.0207*** −0.0232*** −0.0250*** −0.0267*** −0.0315*** −0.0387*** −0.0352***
(0.00126) (0.00145) (0.00151) (0.00125) (0.00185) (0.00241) (0.00169) (0.00192)
CAPRI −0.292*** −0.255*** −0.504*** −0.470*** −0.334*** −0.327*** −0.543*** −0.525***
(0.0179) (0.0116) (0.0169) (0.0191) (0.0254) (0.0164) (0.0237) (0.0301)
SPRI −0.137*** −0.00540 −0.241*** −0.204*** −0.0977*** 0.000304 −0.222*** −0.177***
(0.0137) (0.00915) (0.0140) (0.0162) (0.0222) (0.0127) (0.0298) (0.0254)
ACTRI 0.135*** 0.140*** 0.144*** 0.137*** 0.208*** 0.215*** 0.241*** 0.246***
(0.00759) (0.00589) (0.0103) (0.00736) (0.00933) (0.00947) (0.0164) (0.0122)
MDPI −0.0546*** −0.0933*** −0.0150 −0.0170 −0.177*** −0.270*** −0.220*** −0.207***
(0.0162) (0.0151) (0.0124) (0.0198) (0.0381) (0.0288) (0.0477) (0.0429)
DEPI −5.407*** −5.546*** −5.409*** −8.555***
(0.449) (0.357) (0.451) (0.434)
SHPI −0.306 −0.670 −5.237*** −5.770***
(0.640) (0.624) (0.503) (0.802)
CRPI 0.262*** 0.371*** 0.284*** 0.234***
(0.0712) (0.0683) (0.0874) (0.0760)
LEEI −0.507*** −0.424*** −0.382*** −0.807***
(0.0459) (0.0381) (0.0416) (0.0563)
L* CAPRI
L* SPRI
L* ACTRI
L* SHPI
L* CRPI
L* LEEI
Intercept 5.565*** 2.972*** 5.624*** 6.878*** 28.99*** 23.72*** 13.33*** 31.46***

(0.332) (0.310) (0.371) (0.361) (2.511) (1.845) (1.875) (1.785)
No. observations 993 993 997 997 993 993 997 997
No. banks 70 70 70 70 70 70 70 70
Wald−test 1500*** 865*** 360*** 117*** 339*** 363*** 894*** 367***
38
Panel A Panel B
(1) (2) (3) (4) (5) (6) (7) (8)
Sargan P value 0.9993 0.9994 1.0000 1.0000 0.9992 0.9994 1.0000 1.0000
AR(1) P value 0.0998 0.0979 0.0933 0.0947 0.0991 0.0975 0.0934 0.0945
AR(2) P value 0.5306 0.3920 0.5814 0.5554 0.5200 0.3791 0.5727 0.5411
Panel C Panel D
(9) (10) (11) (12) (13) (14) (15) (16)
L.SDROAt-1 0.621*** 0.623*** 0.593*** 0.593*** 0.623*** 0.617*** 0.610*** 0.621***

(0.00140) (0.00168) (0.00184) (0.00178) (0.00269) (0.00231) (0.00287) (0.00234)
Lerner index (L) −35.93*** −19.84**
(3.757) (9.453)
Boon indicator (L) −3.698** −15.9**
(1.21) (6.75)
HHI (L) 0.0026*** 0.0154**
(0.000835) (0.00708)
CR5 (L) 0.0718*** 0.0864*
(0.0191) (0.0472)
SIZE −0.0389* −0.353*** −0.0188 −0.126*** −0.0208 −0.415*** −0.158*** −0.207*-
**
(0.0222) (0.0227) (0.0198) (0.0193) (0.0393) (0.0379) (0.0388) (0.0449)
NIR 0.0078*** 0.0087*** 0.0113*** 0.0104*** 0.00845*** 0.0051*** 0.00981*** 0.00847*-
**
(0.000320) (0.000558) (0.000706) (0.000431) (0.000554) (0.000493) (0.000679) (0.00061-
1)
COST 0.0139*** 0.0116*** 0.0143*** 0.0142*** 0.0125*** 0.0115*** 0.0150*** 0.0138***
(0.000165) (0.000200) (0.000213) (0.000266) (0.000243) (0.000280) (0.000237) (0.00033-
9)
EQTA −0.0544*** −0.0551*** −0.0614*** −0.0563*** −0.0477*** −0.0525*** −0.0594*** −0.0496-
***
(0.00170) (0.00125) (0.00176) (0.00181) (0.00275) (0.00257) (0.00227) (0.00283)
LNTA −0.0132*** −0.0098*** −0.0166*** −0.0148*** −0.0117*** −0.0085*** −0.0144*** −0.0129-
***
(0.000927) (0.000647) (0.000582) (0.000927) (0.00110) (0.000997) (0.00120) (0.00099-
3)
GDP −0.0551*** −0.0603*** −0.0737*** −0.0648*** −0.0552*** −0.0476*** −0.0784*** −0.0710-
***
(0.00247) (0.00346) (0.00275) (0.00272) (0.00436) (0.00473) (0.00504) (0.00552)
INF 0.0590*** 0.0844*** 0.0754*** 0.0704*** 0.0336*** 0.0239*** 0.0719*** 0.0478***
(0.00458) (0.00378) (0.00404) (0.00358) (0.00458) (0.00640) (0.00529) (0.00820)
FOREIGN 0.0689*** 0.0511*** 0.0715*** 0.0686*** 0.0940*** 0.0575*** 0.0904*** 0.0766***
(0.000830) (0.000925) (0.000999) (0.00124) (0.00296) (0.00382) (0.00339) (0.00275)
GOVERNMENT −0.0285*** −0.0139*** −0.0244*** −0.0241*** −0.0365*** −0.000845 −0.0384*** −0.0348-
***
(0.00138) (0.00188) (0.00159) (0.00222) (0.00299) (0.00260) (0.00302) (0.00332)
CAPRI −1.309*** −0.287*** −0.511*** −0.137 −1.988*** −0.198*** −0.551*** −0.581*-
**
(0.109) (0.0200) (0.0190) (0.0944) (0.246) (0.0244) (0.0391) (0.164)
SPRI −1.126*** −0.227*** −0.249*** 0.122** −1.404*** −0.259*** −0.216*** −0.0773
(0.0675) (0.00890) (0.0164) (0.0516) (0.114) (0.0226) (0.0333) (0.118)
ACTRI 0.464*** 0.235*** 0.149*** 0.150*** 0.444*** 0.380*** 0.248*** 0.586***
(0.0592) (0.0106) (0.0123) (0.0443) (0.110) (0.0236) (0.0216) (0.0767)
MDPI −0.0455** −0.159*** −0.0137 −0.0464** −0.243*** −0.471*** −0.232*** −0.138*-
**
(0.0187) (0.0228) (0.0172) (0.0225) (0.0361) (0.0616) (0.0546) (0.0418)
DEPI −5.333*** −3.833*** −5.420*** −8.285*-
**
(0.609) (0.424) (0.524) (0.526)
SHPI −1.797 −3.759*** −5.881*** −10.12*-
**
(1.281) (1.200) (0.758) (1.326)
CRPI 0.0985 0.548 0.345*** 1.164*
39
Panel C Panel D
(9) (10) (11) (12) (13) (14) (15) (16)
(1.019) (0.354) (0.0751) (0.634)

LEEI −0.0661 −0.745*** −0.419*** −1.045*-
**
(0.119) (0.0759) (0.0484) (0.101)
L* CAPRI 2.148*** 1.640*** 8.67e−05 0.0045*** 3.235*** 2.058** 0.000158 0.00197
(0.222) (0.524) (5.83e−05) (0.00107) (0.478) (0.812) (0.000130) (0.00224)
L* SPRI 2.177*** 4.665*** 0.0018*** 0.0048*** 2.938*** 3.475*** 0.000175** 0.000902
(0.159) (0.628) (6.36e−05) (0.000805) (0.234) (0.970) (6.98e−05) (0.00187)
L* ACTRI −0.564*** −5.907*** −4.82e−05 −0.000141 −0.103 −8.804*** −0.000146 −0.0053-
***
(0.129) (0.358) (5.85e−05) (0.000627) (0.241) (0.512) (0.000115) (0.00118)
L* SHPI 3.868 78.62*** 0.0018*** 0.0394***
(2.431) (11.16) (0.000286) (0.0139)
L* CRPI −0.176 −0.907 −0.00442*- −0.0302
*
(1.768) (13.71) (0.00216) (0.0187)
L* LEEI 1.028*** 8.995*** 6.10e−05 0.00222
(0.179) (0.903) (0.000237) (0.00191)
Intercept 19.30*** 8.813*** 5.513*** 1.099 30.79*** 34.75*** 13.32*** 31.12***
(1.867) (0.355) (0.388) (1.648) (5.712) (2.401) (2.228) (4.458)
No. observations 993 993 997 997 993 993 997 997
No. banks 70 70 70 70 70 70 70 70
Wald−test 1470*** 279*** 323*** 150*** 492*** 105*** 385*** 1430***
Sargan P value 0.9999 0.9992 1.0000 1.0000 0.9999 0.9999 1.0000 1.0000
AR(1) P value 0.1045 0.0940 0.0935 0.0943 0.1010 0.1025 0.0947 0.0944
AR(2) P value 0.5375 0.3738 0.5829 0.5481 0.5112 0.3738 0.5698 0.5318
Dependent variable: Bank stability (ZROA)
Panel A Panel B
(1) (2) (3) (4) (5) (6) (7) (8)
L.ZROAt−1 0.137*** 0.117*** 0.121*** 0.123*** 0.300*** 0.203*** 0.162*** 0.165***

(0.00114) (0.00299) (0.00248) (0.00130) (0.00658) (0.00664) (0.00540) (0.00555)
Lerner index (L) 36.9*** 234.3***
(2.58) (33.18)
Boon indicator (L) 41.09*** 158.7*
(7.97) (88.24)
HHI (L) −0.0697*** −0.241***
(0.00555) (0.0144)
CR5 (L) −0.932*** −1.360***
(0.129) (0.224)
SIZE 20.54*** 6.987*** 7.071*** 3.755* 12.75*** −8.840* 0.116 −0.750
(1.359) (2.372) (1.764) (2.282) (3.610) (4.888) (8.528) (4.841)
NIR −0.687*** −0.498*** −0.319*** −0.338*** −0.688*** −0.495*** −0.212 −0.363***
(0.0891) (0.104) (0.113) (0.0585) (0.164) (0.173) (0.169) (0.137)
COST 0.00248 −0.0175 −0.171 −0.109 0.0338 −0.0107 −0.0320 −0.0784
(0.0457) (0.0682) (0.122) (0.0701) (0.0542) (0.0578) (0.0837) (0.0687)
EQTA 2.129*** 1.793*** 1.087*** 1.108*** 1.801*** 0.567 0.626 0.129
(0.130) (0.532) (0.168) (0.192) (0.610) (0.388) (1.043) (0.701)
LNTA 1.105*** 1.049*** 1.021*** 1.195*** 0.446*** 0.548*** 0.975*** 1.029***
(0.0571) (0.0452) (0.109) (0.115) (0.0685) (0.0616) (0.105) (0.0868)
GDP 0.606*** 1.314*** 1.077*** 1.388*** 0.979*** 2.419*** 2.351*** 2.840***
(0.136) (0.241) (0.218) (0.265) (0.171) (0.253) (0.396) (0.342)
INF −4.819*** −8.539*** −9.611*** −9.029*** −3.136*** −7.239*** −8.189*** −7.602***
(0.517) (0.459) (0.411) (0.501) (0.388) (0.240) (0.764) (0.618)
FOREIGN −0.434** −0.371*** −0.322** −0.105 −3.028*** −1.051 −0.346 −1.362
(0.194) (0.110) (0.134) (0.202) (0.974) (1.169) (0.912) (1.538)
GOVERNMENT 2.745*** 1.818*** 1.854*** 1.876*** 1.389** 0.537 −0.711 0.444
(0.179) (0.117) (0.152) (0.463) (0.543) (0.626) (0.534) (0.850)
CAPRI 5.754** 8.283** 8.050** 7.749 10.29** 20.93*** 4.676 7.541
(2.864) (4.199) (3.161) (6.460) (5.083) (6.386) (7.602) (6.570)
SPRI 26.04*** 30.95*** 38.03*** 33.59*** 29.69*** 19.18* 42.97*** 27.24***
40
Panel A Panel B
(1) (2) (3) (4) (5) (6) (7) (8)
(2.579) (1.652) (2.397) (4.724) (5.957) (10.03) (5.927) (7.594)

ACTRI −18.71*** −15.71*** −15.28*** −14.25*** −31.12*** −14.81* −19.79*** −15.14**
(1.258) (0.964) (1.400) (2.075) (5.644) (8.213) (4.278) (7.357)
MDPI 21.68*** 17.29*** 12.74*** 15.64*** 19.20 6.547 7.123 7.086
(2.571) (4.151) (3.253) (3.947) (14.12) (15.36) (9.510) (13.99)
DEPI 542.6*** 656.2*** 805.8*** 621.8***
(72.25) (105.1) (82.09) (119.1)
SHPI 817.1*** 507.3*** 954.0*** 653.7***
(74.48) (72.30) (109.5) (73.75)
CRPI −37.38*** −18.36 −20.24 −7.339
(14.12) (23.82) (18.19) (28.27)
LEEI 14.41** 53.22*** 47.79*** 32.44***
(6.746) (6.289) (7.282) (6.953)
L* CAPRI
L* SPRI
L* ACTRI
L* SHPI
L* CRPI
L* LEEI
Intercept 304.7*** 707.9*** 780.7*** 741.0*** −2,329*** −3,358*** −4,101*** −2,849***

(63.81) (39.37) (72.27) (145.8) (198.3) (252.7) (320.4) (215.7)
No. observations 993 993 997 997 993 993 997 997
No. banks 70 70 70 70 70 70 70 70
Wald-test 508*** 3260*** 205*** 158*** 921*** 1820*** 1130*** 291***
Sargan P value 0.9999 0.9999 1.0000 1.0000 0.9999 1.0000 1.0000 1.0000
AR(1) P value 0.0062 0.1903 0.1875 0.1886 0.0054 0.1878 0.1946 0.1937
AR(2) P value 0.2302 0.2208 0.2545 0.2313 0.3487 0.2162 0.6602 0.6828
Panel C Panel D
(9) (10) (11) (12) (13) (14) (15) (16)
L.ZROAt−1 0.322*** 0.166*** 0.153*** 0.161*** 0.271*** 0.126*** 0.142*** 0.167***

(0.00981) (0.00345) (0.00323) (0.00404) (0.0146) (0.00573) (0.00935) (0.00641)
Lerner index (L) 3,272*** 9,229**
(1,230) (4,481)
Boon indicator (L) 8.475* 15.414*
(4.226) (8.497)
HHI (L) −0.585*** −4.474**
(0.0597) (2.042)
CR5 (L) −20.12*** −56.57*-
**
(5.014) (21.22)
SIZE 26.92*** 10.54*** 4.739 13.49*** 12.16 29.96*** 19.12** 21.27
(7.627) (4.003) (6.889) (3.827) (8.894) (6.720) (7.835) (20.78)
NIR −0.744*** −0.851*** −0.458*** −0.180 −0.409* −0.124 −0.0475 −0.0585
(0.118) (0.146) (0.140) (0.147) (0.228) (0.203) (0.208) (0.186)
COST −0.0788 −0.0571 −0.0968 −0.0847 −0.139** −0.0181 −0.123 −0.0106
(0.0541) (0.0726) (0.102) (0.0901) (0.0657) (0.104) (0.0923) (0.0905)
EQTA 1.252** 1.444* 1.164 −0.701 3.429** 1.222* −−0.998 1.721
(0.591) (0.797) (1.176) (0.465) (1.525) (0.720) (1.248) (2.740)
LNTA 0.512*** 0.496*** 0.742*** 0.674*** 0.321*** 0.841*** 0.973*** 0.967***
(0.0616) (0.0600) (0.126) (0.0943) (0.0927) (0.142) (0.135) (0.156)
GDP 4.277*** 1.320*** 1.330*** 1.799*** 0.275 2.266*** 3.534*** 2.638***
(0.250) (0.381) (0.297) (0.247) (0.680) (0.626) (0.577) (0.685)
41
Panel C Panel D
(9) (10) (11) (12) (13) (14) (15) (16)
INF −2.399*** −7.532*** −10.20*** −9.288*** −0.0207 −5.744*** −10.32*** −9.196*-

**
(0.405) (0.297) (0.609) (0.437) (0.656) (0.975) (0.914) (1.547)
FOREIGN −1.215*** −1.586*** −0.643** −0.711* −1.833 −1.227 −1.900 −1.597
(0.247) (0.269) (0.282) (0.366) (1.431) (1.165) (2.683) (2.196)
GOVERNMENT 0.303 1.085*** 1.663*** 1.110*** 0.764 2.125** 0.753 1.143
(0.459) (0.288) (0.293) (0.197) (1.044) (0.896) (2.005) (1.640)
CAPRI 138.4*** 0.313 2.448 95.66*** 210.9* 0.196 11.28 123.3*
(34.13) (4.732) (5.218) (20.59) (111.1) (7.152) (10.04) (69.89)
SPRI 34.40* 21.03*** 33.41*** 20.72 134.0* 20.79*** 23.77** 37.80
(18.80) (5.421) (5.467) (16.82) (70.70) (6.724) (10.22) (48.01)
ACTRI −74.17*** −14.38*** −10.90*** 7.700 −95.35* −22.28*** −0.723 35.84
(15.17) (3.052) (4.011) (12.56) (49.26) (6.892) (8.394) (26.89)
MDPI 28.18*** 18.00*** 4.535 12.67** 28.52 7.808 21.71 24.44
(5.568) (4.705) (5.271) (5.597) (30.03) (11.02) (19.82) (26.14)
DEPI 436.4*** 567.7*** 1,053*** 743.5***
(138.9) (90.58) (161.2) (165.0)
SHPI 312.7 543.6*** 1,348*** 1,647***
(340.8) (111.8) (168.1) (402.7)
CRPI −445.1 −153.6** −19.18 −119.6
(372.6) (68.17) (39.82) (140.8)
LEEI 4.699 39.62*** 43.68*** 9.710
(22.87) (8.210) (10.61) (35.34)
L* CAPRI −303.0*** −309.0 −0.0144*** −1.269*** −483.8** −102.6 −0.00520 −1.416
(74.50) (312.0) (0.00460) (0.271) (225.3) (393.4) (0.0227) (1.067)
L* SPRI −25.26 −81.52 −0.0192*** −0.730*** −232.0 −152.4 −0.0262*** −0.922
(42.39) (157.5) (0.00408) (0.230) (143.1) (281.5) (0.0101) (0.762)
L* ACTRI 109.4*** 345.1*** 0.0210*** 0.202 131.7 87.87 0.0592*** 0.624
(32.93) (103.9) (0.00418) (0.162) (86.43) (210.0) (0.0137) (0.485)
L* SHPI −663.4 −3,388 −0.652*** −12.06**
(630.6) (2,765) (0.160) (5.243)
L* CRPI 666.2 6,532*** 0.482 2.456
(619.4) (2,483) (0.483) (3.586)
L* LEEI −62.97 −7.341 −0.0507* −0.285
(46.56) (128.4) (0.0293) (0.647)
Intercept 2,628*** 747.9*** 599.1*** −593.5 1,663 −2,580*** −5,814*** −7,438*-
**
(589.0) (113.1) (105.5) (383.1) (2,089) (346.9) (401.9) (1,276)
No. observations 993 993 997 997 993 993 997 997
No. banks 70 70 70 70 70 70 70 70
Wald-test 263*** 908*** 488*** 534*** 311*** 1190*** 2170*** 472***
Sargan P value 1.0000 0.9998 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
AR(1) P value 0.0040 0.1916 0.2010 0.1943 0.0098 0.1911 0.2023 0.1903
AR(2) P value 0.2741 0.1169 0.8630 0.7551 0.4274 0.0249 0.6579 0.5350
Note: Table reports estimation results for the impact of bank competition on bank risk-taking behavior and stability for overall period (1998-2016)
after controlling for the ownership variables, regulation variables, environmental variables and Interaction terms using two-step system GMM
dynamic panel model by Arellano and Bover (1995). The dependent variables are the standard deviation of ROA (SDROA) calculated from a three-
period based rolling window, and Z-score index based on ROA (ZROA. Lerner Index, Boone indicator, Herfindahl–Hirschman Index (HHI), and 5-
bank concentration ratio (CR5) are the market power indexes. SIZE is the logarithm of total assets. NIR refer to income diversification of banks
measured by non-Interest revenue to total revenue. COST is the ratio of operating expenses to total income. EQTA refers to the bank capitalization
calculated as the ratio of total equity to total assets. LIQ refer to bank liquidity calculated by the ratio of total loans to total assets. GDP is annual
GDP growth rate. INF is annual inflation rate. Ownership variables: FOREIGN is foreign ownership, GOVERNMENT is government ownership.
Regulation variables: CAPRI refer to capital requirements index, SPRI refer to supervisory power index, ACTRI refer to activity restrictions index,
MDPI refer to market discipline index. Environmental variables: DEPI refer to deposit insurance, SHPI refer to shareholder protection, CRPI refer to
creditor protection, LEEI refer to legal efficiency. L* CAPRI, L* SPRI, L* ACTRI, L* SHPI, L* CRPI, and L* LEEI refers to the interaction between
market competition measures with capital requirements index, supervisory power index, activity restrictions index, shareholder protection, creditor
protection, and legal efficiency respectively. The Sargan test is the test for over-identifying restrictions in GMM estimation. AB test AR(1) and AR(2)
refer to the Arellano–Bond test that average autocovariance in residuals of order 1 resp. of order 2 is 0 (H0: no autocorrelation). The standard errors
are in parentheses. *** Significance at the 1% level, ** Significance at the 5% level,* Significance at the 10% level.
42
population) from the dataset in the first stage; then we exclude UAE banks (which accounts for 19% of the sample population) in the
second stage. In the third stage, we exclude both Bahraini and UAE banks and carry-out our analysis. Our main findings remain
unchanged despite the removal of a large sample of observation. Second, to check whether variations in the macroeconomic and the
financial environment explain stability and risk exposures of banks, we included stock market capitalization and domestic credit to
private sector as a percent of GDP as control variables in our analysis. We also incorporate bank level fixed effects variables as
dummies in all the regressions. Inclusions of these new parameters do not alter our main results. Third, following Ariss (2010) and Fu
et al. (2014), we replace conventional Lerner index by efficiency-adjusted Lerner index as a measure of competition in the banking
market in all regressions. Our main results remain consistent. Fourth, to capture a possible non-linear relationship among competition
with bank risk and stability, we follow Soedarmono et al. (2013), Fu et al. (2014), and Kasman and Kasman (2015), and replace
Lerner index by a quadratic term for the Lerner index in all our regressions. Our findings also remain unchanged in this robustness
check. Fifth, we also consider the following modifications of our empirical model. We consider two variables for ownership (foreign
and government), four variables on regulations (capital requirements index (CAPRI), supervisory power index (SPRI), activity re-
strictions index (ACTRI), and market discipline index (MDPI)) and three for environmental and institutional developments (Share-
holder protection (SHPI), Creditor protection (CRPI), Legal efficiency (LEEI)), including the existence of Deposit insurance (DEPI). In
addition to the variables of ownership, regulations and environmental, we also include the interaction between the measures of bank
competition and concentration with the regulatory variables as well as environmental variables to examine whether the total effect of
regulations can change the sign depending on the value of market power.
Table 15 presents the estimation results after implementing the ownership variables, regulatory factors, and environmental
variables. Compared with the benchmark results in Table 4, the relationship between bank competition (Lerner index and Boone
indicator) and concentration (HHI and CR5) with risk-taking (SDROA, SDROE, NPL, and LLP) or stability (ZROA and ZROE) presents
the identical direction. This implies that there is a significantly negative relationship between the Lerner index and Boon indicator
with bank risk-taking behavior and a positive relationship between the Lerner index and Boon indicator with bank stability. At the
same time, HHI and CR5 have a positive and significant impact on bank risk-taking behavior and a negative impact on bank stability.
Bank ownership appears to be another important parameter, a higher presence of foreign (state-owned) banks in the market results in
higher (lower) risk-taking. These findings are not consistent with the literature that suggests a number of benefits from the entry of
foreign banks in developing markets as well as the negative impact of state-owned banks on the banking stability (Agoraki et al.,
2011). Nevertheless, taking regulatory and environmental variables into consideration decrease (increase) the positive persistence of
risk-taking (stability). Our results suggest that countries with greater capital stringency, a higher supervisory power, a higher degree
of market discipline and private monitoring, under explicit deposit insurance schemes, higher shareholder protection, or higher legal
efficiency decrease banks’ risk-taking and increase their stability. On the other hand, banks’ risk (stability) will increase (decrease) for
countries with greater regulatory restrictions on commercial bank activities or higher creditor protection. This implies that countries
with greater regulatory restrictions and higher creditor protection decrease banks’ stability, but at the same time increase their risk.
Notably, in the regressions that include the interaction between market power and regulatory and environmental variables, inter-
action between market power and the capital requirements index (L*CAPRI), market power and supervisory power index (L*SPRI),
market power and shareholder protection (L* SHPI), and market power and legal efficiency (L*LEEI) enters with a positive (negative)
and significant coefficient with risk-taking (stability). These indicate that CAPRI, SPRI, SHPI, and LEEI have an independent effect on
bank risk and stability. However, these impact decreases for banks with greater market power. The interaction between market power
and the capital requirements index (L*ACTRI) and market power and creditor protection (L*CRPI) enters with a negative (positive)
and significant coefficient with risk-taking (stability), indicating that activity restrictions and creditor protection increase (decrease)
the risk-taking (stability) of banks with low market power. In other words, activity restrictions and creditor protection limit the risk-
taking of banks with high market power, thus enhancing bank soundness. These results in line with the findings of Agoraki et al.
(2011) who argue that as the integration of financial services gets restricted, banks focus on the loan market to replace the forgone
non-interest income. However, due to the increased competition, banks with low market power in lending may view the financing of
risky borrowers as the only way to attract customers and increase their market share. Overall, it seems that ignoring the interactions
between regulations and market power will lead to erroneous inference about the impact of regulations on both risk and stability of
banks.
Sixth, this study takes into account the analysis based on a subsample of banks with different level of capitalization, liquidity, and
size before, during and after the global financial crisis (see Table 16). Table 16 shows that our findings remain similar to the main
results that reported in Tables 10–14.
6. Conclusions
In this paper, we examine the association between the competition and bank risk-taking behavior and stability using both bank
risk-taking behavior (SDROA, SDROE, NPL, and LLP) and bank stability (ZROA and ZROE) measures. We use data of 70 commercial
banks from 6 GCC economies over the 1998–2016 periods. We incorporate both the competition (Boone indicator and Lerner index)
and the concentration (HHI and CR5) measures in 4 separate models for each dependent variable to determine their impact on bank
risk-taking behavior and stability. We also estimate the impact of market power in the banking industry in the GCC economies during
pre and post global financial crisis periods to account for the changes in the market structure on bank risk-taking and stability.
Furthermore, we analyze the banks' response to competition based on their characteristics of financial strength (capitalization,
liquidity, and size). We also divide the analysis based on a subsample of banks with different level of capitalization, liquidity, and size
before, during and after the global financial crisis. To investigate the robustness of the empirical results, we also consider the
43
Table 16
Estimation results of bank risk-taking behavior equation on subsample of banks with different level of capitalization, liquidity and size before, during and after financial crisis.
Before the financial crisis: 1998–2006 During the financial crisis: 2007–2009 After the financial crisis: 2010–2016
1 2 3 4 1 2 3 4 1 2 3 4
Panel A: Banks with high capitalization (high equity to total assets)

L.SDROAt-1 0.551*** 0.534*** 0.531*** 0.482*** 1.722*** 1.844*** 1.519*** 1.588*** 0.507*** 0.529*** 0.488*** 0.472***
(0.000452) (0.000797) (0.000580) (0.000144) (0.432) (0.302) (0.445) (0.416) (0.00563) (0.00468) (0.000877) (0.00201)
Lerner index −2.651*** −24.30** −25.85***
(0.0235) (10.82) (1.360)
Boone indicator −3.718*** −10.96** −53.7***
(0.0648) (4.98) (5.851)
HHI 0.00181** 0.0756* 0.0064***
(0.000889) (0.0409) (0.00182)
CR5 0.0628*** 0.325** 0.0409***
(0.000239) (0.121) (0.00176)
Panel B: Banks with low capitalization (low equity to total assets)

L.SDROAt-1 0.782*** 0.687*** 0.682*** 0.546*** 0.834*** 0.783*** 0.776*** 0.806*** 0.275*** 0.180*** 0.317*** 0.330***
(0.00557) (0.00696) (0.00312) (0.0135) (0.137) (0.105) (0.133) (0.0880) (0.0380) (0.0259) (0.0149) (0.0140)
Lerner index 1.690*** 2.710** 3.262***
(0.112) (0.917) (0.487)
Boone indicator 8.305*** 3.668** 17.50***
44
(0.281) (1.715) (3.263)
HHI −0.0018*** 0.00443** −9.65e−05
(3.39e−05) (0.00220) (0.000158)
CR5 −0.0310*** 0.0972*** 0.00320***
(0.00508) (0.0222) (0.000641)
Panel C: Banks with high liquidity (low loans to total assets)

L.SDROAt-1 0.662*** 0.649*** 0.626*** 0.598*** 1.262*** 1.214*** 1.240*** 1.196*** 0.270*** 0.306*** 0.285*** 0.269***
(0.000861) (0.00121) (0.00152) (0.00259) (0.321) (0.356) (0.361) (0.321) (0.00555) (0.00535) (0.000380) (0.00284)
Lerner index −0.511*** −12.84** −21.93***
(0.0601) (5.450) (0.665)
Boone indicator −18.80*** −18.59* −67.79***
(0.0333) (9.63) (4.130)
HHI 0.0035*** 0.0362* 0.00059*
(0.000468) (0.0195) (0.000318)
CR5 0.0531*** 0.197* 0.0206***
(0.00231) (0.101) (0.00111)
Panel D: Banks with low liquidity (high loans to total assets)

L.SDROAt-1 0.572*** 0.519*** 0.480*** 0.477*** 0.434 0.541 0.622 0.446 0.546*** 0.592*** 0.575*** 0.574***
(0.00926) (0.00710) (0.00881) (0.0111) (1.285) (1.091) (1.114) (1.197) (0.00330) (0.00169) (0.00132) (0.00110)
Lerner index 1.591*** 11.25* 4.878***
(0.0931) (6.716) (1.214)
Boone indicator 6.726*** 1.174** 14.66***
(0.290) (0.430) (1.437)
HHI −0.0019*** −0.00476 −0.000653**
(7.73e−05) (0.00947) (0.000300)
1 2 3 4 1 2 3 4 1 2 3 4
CR5 −0.0049*** −0.0207* −0.000740*

(0.000734) (0.0136) (0.000413)
Panel E: Banks with large size

L.SDROAt-1 0.540*** 0.448*** 0.433*** 0.438*** 0.895*** 0.849*** 0.833*** 0.865*** 0.244*** 0.298*** 0.289*** 0.294***
(0.00492) (0.00642) (0.00356) (0.00572) (0.0352) (0.0214) (0.0687) (0.0217) (0.0342) (0.0405) (0.0229) (0.0183)
Lerner index −1.662*** −3.480** −2.119**
(0.0949) (1.471) (0.803)
Boone indicator −2.420*** −5.444*** −2.929**
(0.166) (2.010) (1.096)
HHI 0.0011*** 0.00554*** 6.92e−05
(5.64e−05) (0.00166) (6.35e−05)
CR5 0.0104*** 0.0250* 0.000788*
(0.00199) (0.0147) (0.000449)
Panel F: Banks with small size

L.SDROAt-1 0.588*** 0.568*** 0.582*** 0.555*** 1.537*** 1.525*** 1.048* 1.496*** 0.498*** 0.525*** 0.482*** 0.468***
(0.000982) (0.000877) (0.000807) (0.000440) (0.404) (0.448) (0.539) (0.406) (0.00600) (0.00507) (0.000848) (0.00150)
Lerner index 2.773*** 23.85** 28.77***
(0.0370) (11.45) (1.692)
45
Boone indicator 3.296*** 9.402* 64.7***
(0.0359) (5.76) (6.363)
HHI −0.0054*** −0.0198 −0.025***
(0.000524) (0.161) (0.00626)
CR5 −0.0436*** −0.236* −0.0343***
(0.000592) (0.130) (0.00172)
1 2 3 4 1 2 3 4 1 2 3 4
Panel A: Banks with high capitalization (high equity to total assets)

L.ZROAt-1 0.0321*** 0.0292*** 0.0312*** 0.0352*** 0.567*** 0.533*** 0.124*** 0.566*** 0.600*** 0.584*** 0.554*** 0.583***
(0.000372) (0.000202) (1.79e−05) (4.12e−05) (0.185) (0.118) (0.0165) (0.187) (0.0261) (0.0444) (0.0100) (0.0109)
Lerner index 79.19*** 24.41** 20.5***
(0.482) (10.5) (211.1)
Boone indicator 76.3*** 47.7*** 3.432**
(3.70) (12.6) (1.534)
HHI −0.416*** −0.584* −0.383***
(0.0284) (0.329) (0.0672)
CR5 −1.401*** −0.813** −0.818**
(0.0782) (0.243) (0.326)
1 2 3 4 1 2 3 4 1 2 3 4
Panel B: Banks with low capitalization (low equity to total assets)

L.ZROAt-1 0.135*** 0.0548*** 0.104*** 0.0654*** 0.358* 0.361* 0.424* 0.349* 0.367*** 0.152*** 0.134*** 0.132***
(0.00253) (0.00248) (0.00207) (0.00194) (0.204) (0.207) (0.256) (0.193) (0.0310) (0.0280) (0.00826) (0.00836)
Lerner index −3.153** −71.89*** −47.15**
(1.52) (5.44) (22.4)
Boone indicator −21.81*** −88.021*** −19.307***
(6.15) (21.0) (3.501)
HHI 0.0234*** 1.109** 0.103
(0.00160) (0.0977) (0.0799)
CR5 2.563*** 1.269** 2.788***
(0.0763) (0.994) (0.588)
Panel C: Banks with high liquidity (low loans to total assets)

L.ZROAt-1 0.391*** 0.317*** 0.359*** 0.329*** 1.022 0.816 0.594 0.719 0.401*** 0.436*** 0.394*** 0.391***
(0.00424) (0.00209) (0.00635) (0.00569) (0.782) (0.810) (0.571) (0.695) (0.00986) (0.0231) (0.00412) (0.0131)
Lerner index 158.9*** 11.181** 11.009**
(2.378) (5.108) (4.549)
Boone indicator 298.8*** 2.328* 5.559**
(19.07) (1.207) (2.067)
46
HHI −0.0525*** −0.355* −0.167***
(0.00493) (0.244) (0.0494)
CR5 −0.302*** −2.383* −0.616**
(0.0540) (1.260) (0.303)
Panel D: Banks with low liquidity (high loans to total assets)

L.ZROAt-1 0.0433*** 0.0215*** 0.0350*** 0.0350*** 0.257*** 0.268*** 0.508 0.262*** 0.203*** 0.0737** 0.117*** 0.122***
(0.00117) (0.000227) (0.000236) (0.000614) (0.0661) (0.0712) (0.492) (0.0623) (0.0222) (0.0294) (0.00736) (0.00863)
Lerner index −54.44*** −53.1* −71.00***
(2.249) (29.32) (20.1)
Boone indicator −3.138*** −18.95* −21.046***
(0.6134) (9.54) (4.053)
HHI 0.0653*** 0.194* 0.212**
(0.000858) (0.103) (0.0746)
CR5 2.918*** 0.492* 1.293***
(0.0567) (0.293) (0.474)
Panel E: Banks with large size

L.ZROAt-1 0.120*** 0.0480*** 0.0866*** 0.0909*** 1.065** 0.830* 0.818* 0.847* 0.220*** 0.126*** 0.130*** 0.134***
(0.00332) (0.00408) (0.00309) (0.00357) (0.498) (0.424) (0.430) (0.442) (0.0304) (0.0386) (0.00727) (0.00900)
Lerner index 49.54*** 67.54*** 95.5**
(5.408) (10.1) (46.6)
Boone indicator 19.71*** 25.9* 21.857***
(1.119) (14.0) (5.326)
HHI −0.0262*** −0.782*** −0.0613*
(0.00207) (0.114) (0.0384)
CR5 −0.845*** −1.276*** −0.392
(0.133) (0.140) (0.813)

1 2 3 4 1 2 3 4 1 2 3 4
Panel F: Banks with small size

L.ZROAt-1 0.0335*** 0.0314*** 0.0367*** 0.0379*** 0.240*** 0.254*** −0.237 0.289*** 0.532*** 0.533*** 0.508*** 0.530***
(0.000200) (0.000114) (0.000122) (3.94e−05) (0.0394) (0.0370) (0.696) (0.0420) (0.0357) (0.0454) (0.0138) (0.0124)
Lerner index −14.8*** −8.152* −74.34***
(0.596) (4.681) (15.86)
Boone indicator −87.05*** −28.632** −3.642**
(8.064) (12.711) (1.822)
HHI 1.271*** 0.0306 1.999***
(0.273) (0.842) (0.617)
CR5 0.159*** 2.253** 2.428***
(0.0215) (1.059) (0.348)
Note: Table reports estimation results for the impact of bank competition on bank risk-taking behavior for banks with different level of capitalization, liquidity and size before, during and after financial
crisis. To analyses the data before and after financial crisis periods, the two-step system GMM dynamic panel model by Arellano and Bover (1995) is used, while Least Square Dummy Variable (LSDV)
technique is used to analyse the data of the global financial crisis period (2007–2009). The dependent variables are the standard deviation of ROA (SDROA) calculated from a three-period based rolling
window, and Z-score index based on ROA (ZROA. Lerner Index, Boone indicator, Herfindahl–Hirschman Index (HHI), and 5-bank concentration ratio (CR5) are the market power indexes. SIZE is the
logarithm of total assets. NIR refer to income diversification of banks measured by non-Interest revenue to total revenue. COST is the ratio of operating expenses to total income. EQTA refers to the bank
capitalization calculated as the ratio of total equity to total assets. LIQ refer to bank liquidity calculated by the ratio of total loans to total assets. GDP is annual GDP growth rate. INF IS annual inflation
47
rate. Ownership variables: FOREIGN is foreign ownership, GOVERNMENT is government ownership. Regulation variables: CAPRI refer to capital requirements index, SPRI refer to supervisory power
index, ACTRI refer to activity restrictions index, MDPI refer to market discipline index. Environmental variables: DEPI refer to deposit insurance, SHPI refer to shareholder protection, CRPI refer to
creditor protection, LEEI refer to legal efficiency. L* CAPRI, L* SPRI, L* ACTRI, L* SHPI, L* CRPI, and L* LEEI refers to the interaction between market competition measures with capital requirements
index, supervisory power index, activity restrictions index, shareholder protection, creditor protection, and legal efficiency respectively. The Sargan test is the test for over-identifying restrictions in GMM
estimation. AB test AR(1) and AR(2) refer to the Arellano–Bond test that average autocovariance in residuals of order 1 resp. of order 2 is 0 (H0: no autocorrelation). The standard errors are in
parentheses. *** Significance at the 1% level, ** Significance at the 5% level,* Significance at the 10% level.
following modifications of our empirical model. First, we replace the conventional Lerner index by efficiency-adjusted Lerner index
and a quadratic term for the Lerner index as measures of competition in the banking market. Second, we consider two variables for
ownership, four variables on regulations and four variables for environmental (institutional) developments, including the existence of
deposit insurance. Third, the interaction between market power and regulatory and environmental variables are also included.
Our empirical results indicate that both Lerner index and Boone indicator have a negative and significant effect on all bank risk-
taking (SDROA, SDROA, NPL, and LLP) and significant positive effect on bank stability (ZROA and ZROA). These imply that a higher
degree of market power/ and lower competition in the banking market decreases the bank risk-taking behavior and improves bank
stability. However, we find that bank concentration (HHI and CR5) is positively and significantly associated with bank risk-taking
behavior and negatively and significantly related to bank stability. Our results suggest that banks in a higher concentrated market
take greater risk and less stable. Overall, our results indicate that banks are less risky and more stable in a less competitive market
with greater market power and in a market with lower concentration. We also find that greater market power/lower competition in
the banking market contribute to the reduction of moral hazard and maintain the stability of banks during the 2008 global financial
crisis that has affected GCC banking sectors. We find that higher market power, lower level of competition and lower concentration in
the banking market increase the bank risk-taking and decrease the stability of low capitalized, low liquid and small banks in contrast
to the highly capitalized, highly liquid and large banks.
In sum, our analyses not only highlight that the association of bank competition measures with individual risk-taking are negative
and significant but also show that bank concentration measures are positively and significantly associated with bank fragility.
Furthermore, bank competition measures are positively and significantly related to bank stability while concentration measures are
negatively associated with it. Our findings support both the theories of competition-fragility and competition-stability in the context
of the GCC banking markets. Our results suggest that consistent with the traditional “competition-fragility” view, banks with a higher
degree of market power also have less overall risk exposure. However, the data also provides some support for of the “competition-
stability” view – that market power does increase loan risk in these countries. This risk may be offset in part by higher equity capital
ratios. We confirm with robustness tests that our results for regulatory quality and environmental (institutional) developments are
independent of differences in risk and stability. Our results also confirm that the use of a single measure of competition (e.g., bank
concentration) is insufficient to identify its role because it might give misleading results.
Our findings highlight various policy implications in the GCC economies: First, policy planners may encourage mergers between
banks with low capitalization, low liquidity, and small size with banks of medium capitalization, medium liquidity, and medium-size
banks to improve stability. However, regulators should simultaneously be watchful while evaluating and approving merger proposals
to prevent excessive concentration. Second, they should foster the development of sound credit culture in banks to avoid exuberance
in their lending behavior resulting in banking instability arising out of shocks like the global financial crisis. Third, regulators in these
economies may like to foster financial innovation with the corresponding strengthening of the risk management culture and ar-
chitecture in banks to improve the efficiency of resource allocation within an economy. Fourth, the banking supervision mechanism
may be made more robust to pre-empt excessive risk-taking by banks. Fifth, our results suggest that banking sector in these countries,
with explicit deposit insurance, are more stable. However, international experience also indicates that deposit insurance schemes
appear to increase moral hazard and risk shifting behavior so any policy moves to increase coverage should be treated with caution as
this could have the unintended consequence of boosting risk as opposed to promoting stability. Sixth, our findings suggest that the
banking market in GCC has yet to attain appropriate sophistication in competitive structure to face the onslaught of the forces of
banking competition in the era of globalization. Banks in these economies are found to be more stable and less risky when the
environment is less competitive. A policy framework for the careful surveillance of developments like international financial in-
tegration, free entry of foreign banks, privatization and deregulation, and banking consolidations that affect the competitive con-
ditions in the banking industry needs to be in place. Competition policies may act as a catalyst to support financial stability and create
the appropriate conditions for stable financial markets. The global financial crisis has stressed the importance of reconsidering the
role of competition policy and competition agencies in these markets. Our findings underline the importance of regulatory policies
and market structure for stability. Apart from a direct effect of these policies and market structure on the risk-taking incentives of
banks, they also have an indirect effect by dampening or exacerbating the effect of competition on banks’ riskiness. In effect, a deeper
insight into the competition policies in the banking sector in the GCC economies is the need of the hour.
Appendix A. Supplementary data
Supplementary data to this article can be found online at https://doi.org/10.1016/j.najef.2018.10.015.
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Impact of Bank Competition & Concentration On Risk Taking & Stability

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North American Journal of Economics

The impact of bank competition and concentration on bank risk-

ARTICLE INFO ABSTRACT

E-mail addresses: azizalyousfi@yahoo.com, abdulazeez@uum.edu.my, abdulazeez_yhsa@taiz.edu.ye (A.Y.H. Saif-Alyousfi),

3. Data, variables and descriptive statistics

3.2. Concentration and competition measures

3.3. Bank competition measures

3.3.1. Lerner index

3.3.2. Boone indicator

3.3.3. Static measures

3.4. Bank risk measures

where ROA is return to total assets, EQTA is equity to total assets.

where ROE is return on equity.

3.5. Control variables measures

3.6. Descriptive statistics

Translog specification (2014), Kasman and Bankscope

(FOREIGN) Supervision Database, World

Dependent Variables (Bank risk and stability)

Variable Bahrain Kuwait Oman

Variable Qatar Saudi Arabia UAE

Variable Bahrain Kuwait Oman

CRPI 4 0 4 4 3.63 0.93 3 5 4 0 4 4

5.1. Overall results

3 NPL .614* .227* 1

18 0.165* −0.345* 0.020* −0.089* 1

21 0.087* −0.090* 0.042* −0.051 0.260* −0.279* −0.528* 1

SDROA SDROE NPL

LLP ZROA ZROE

SDROA SDROE NPL

HHI .001*** −.056*** −.006***

(.0002) (.004) (.0002)

5.2. Pre, during and post global financial crisis periods

Variable Subsample 1998–2006 Subsample 2007–2009 Subsample 2010–2016

SDROA 0.813809 1.47618 0.930743

SDROA SDROE NPL

LLP ZROA ZROE

SDROA SDROE NPL

HHI .009** −.045*** −.003*

(.004) (.006) (.001)

SDROA SDROE NPL

LLP ZROA ZROE

SDROA SDROE NPL

CR5 .190** .089* .226*

(.088) (.045) (.114)

SDROA SDROE NPL

LLP ZROA ZROE

SDROA SDROE NPL

HHI .003** −.115** −.021***

(.001) (.056) (.004)

5.3. Bank characteristics and competition

5.4. Robustness tests

SDROA SDROE NPL

LLP ZROA ZROE

SDROA SDROE NPL

HHI .004** −.444** −.032***

(.001) (.220) (.001)

SDROA SDROE NPL

LLP ZROA ZROE

SDROA SDROE NPL

HHI −.003** .063*** .009***

(.001) (.015) (.002)

HHI .001* −.056* −.006***

HHI .009 −.045* −.003*

HHI .003 −.115 −.021***

HHI .004 −.444 −.032***

HHI −.003 .063* .009***

HHI .004* −.063 −126***

HHI −.0007* .084* .006***

HHI −.020* .443* .252***

L.SDROAt-1 0.622* 0.626* 0.593* 0.596* 0.639* 0.638* 0.608* 0.623*

Intercept 5.565* 2.972* 5.624* 6.878* 28.99* 23.72* 13.33* 31.46*

L.SDROAt-1 0.621* 0.623* 0.593* 0.593* 0.623* 0.617* 0.610* 0.621*

L.ZROAt−1 0.137* 0.117* 0.121* 0.123* 0.300* 0.203* 0.162* 0.165*

Intercept 304.7* 707.9* 780.7* 741.0* −2,329* −3,358* −4,101* −2,849*

L.ZROAt−1 0.322* 0.166* 0.153* 0.161* 0.271* 0.126* 0.142* 0.167*

INF −2.399* −7.532* −10.20* −9.288* −0.0207 −5.744* −10.32* −9.196*-