The Impact of Market Concentration on Bank Risk-Taking: Evidence from a Panel Threshold Model

This study investigates the presence of a non-linear relationship between market concentration and bank risk-taking using a balanced dataset of 78 European commercial banks during the period 2006 to 2016. In order to test the hypothesis of nonlinearity, this study applies the threshold estimation technique developed by Hansen (1999). We choose the non-performing loans ratio, the loan loss provision ratio to measure credit risk, and the cat-nonfat to proxy liquidity risk. Our main findings are twofold. The outcome of our analysis indicates that the threshold effect indeed exists. Moreover, our results suggest that there is a significant positive relationship between market concentration and bank credit risk. This positive impact is diminished when the level of market concentration is above a certain threshold. Overall, this study finds evidence that banks' risk-taking behavior varies under different levels of market concentration. The results are robust under additional tests. These findings have strong implications for regulators.