Research On The Influence Of Market Competition On Risk-taking Behaviors Of Commercial Banks

Since the 1970 s, with the financial liberalization of Western countries, banking industry controls were gradually relaxed, the competition in the banking sector was increasingly fierce. Banking competition make the market more active, and enhance management efficiency and improve social welfare. However, It gave us a wake-up call after the frequently events of bank failures in developed countries. Academics have done many a research on the risks of banking, and when it comes to the relationship between competition and the risks that banks have to bear, it's nowhere near to a conclusion. Some scholars think that competition will increase the risks that banks have to take, thus making the banking system more vulnerable; while some think that competition will decrease the risks that banks have to take, thus making the banking system more stable. Apart from those two opinions, there are scholars who also point out that the relationship between competition and the risks that banks have to take is uncertain. Although not yet a unified point of view, but the risk of competition to bear influence is beyond doubt.As for the influences of competition between banks on the risks that banks have to take, this thesis have analyzed saving market and loaning market separately. When it comes to saving market, this thesis has considered a two-phase economic framework, which is based on the theoretical framework of banking franchise value framework and the explanations of dynamic gaming model of Repullo's(2004) imperfect competition. To be specific, saving competition will push saving interest to a relatively high place, which will devour the profit of the bank and increase the incentives for the banks to choose high-risk assets, which then will increase the risks the banks have to take. As for the loaning market, the thesis has used MMR theoretical model to explain the influences of competition on the risks of banks. Loaning competition will result in "risk diversion effect" and "profit margin effect", and since the two have different directions, which makes the relationship between loan competition and risks appear in the shape of "U". Competition will force banks to decrease loaning interest, which will ease the burden on the shoulders of loaners, whose inclinations to make risky investments have therefore dropped, so that the banks will have fewer risks. However, if competitions get worse, the loaning interest that is dropping lower and lower will hurt banks' abilities to make profits, and the risks will increase accordingly.This thesis has selected data from 14 major national banks from 2014 to 2015, and studied the effects of loan price competition on the risk of commercial banks, using Lerner index to measure the loan price competition between banks. The results show that the relationship between deposit price competition and bank risks is linear. Bank competition will help ease liquidity risk, but will increase the risk of bankruptcy of banks. In addition, though the deposit price competition is pushing up the cost of the bank, because of the constraints of loan competition, the cost will not be transferred to credit markets and will not worsen credit risk. However, the relationship between price competition and bank risk is U-shaped. At this stage, China's credit market are at the same time effected by the "margin effect" and "risk transfer effect", and maintaining a high competition or monopoly are both conducive to the bank stability. In the end, the advices were given based on the results and the current situation.