Impact of Competition on Credit Risk, Overall Bank Risk and Revenue Diversification

Abstract

This Paper investigates the effects of competition on credit risk, overall bank risk and revenue diversification for the period 1998-2010 by employing 173 banks from selected ASEAN countries (Indonesia, Malaysia, Philippines, Thailand and Vietnam). We also examine the effects of financial crisis years for selected sample. We use three proxies of bank stability to measure the effects of changing competition. Our findings suggest that, even though changing competition results in volatile fluctuation in the level of non-performing loan risk, ASEAN banks engaged in more revenue diversification activities to offset the increasing overall bank risk level by utilizing various risk-mitigating strategies. During crisis years, banks failed to control the credit risk thus indicated negative correlation while other two proxies reported significant results meaning that ASEAN banks focused on more non-traditional income generating sources to compensate the burden of overall bank risk. These results remain consistent across all models providing robust results.

Keywords: credit risk, financial crisis years, overall bank risk, revenue diversification

JEL Classification: G21