Risk, competition, efficiency and its interrelationships: evidence from the Chinese banking industry

Purpose This study investigates the interrelationships between efficiency, competition and risk in the Chinese banking industry. Design/methodology/approach Parametric stochastic frontier analysis is used to estimate bank efficiency; the Lerner index is used as the competition indicator; accounting ratios and a translog function are used to measure different types of risk and finally, the three-stage least square estimator is used to investigate the interrelationships. Findings The results of this study show that the impact of competition on different types of risk is significant and positive, while there is a significant and positive impact of credit risk, liquidity risk and capital risk on bank competition. In addition, the findings demonstrate that the interrelationships between efficiency and competition are significant and negative. The authors do not find any robust interrelationships between different types of risk and different types of efficiency; the authors find that diversification and higher levels of profitability reduce bank credit risk. The results suggest that a higher developed banking sector reduces the level of bank competition in China. Originality/value This is the first piece of research that comprehensively investigates the interrelationships between different types of risk, competition and different efficiencies in China.

Automated summary

The study found that competition has a significant positive impact on different types of risk, while credit risk, liquidity risk, and capital risk have a significant positive impact on bank competition. Furthermore, the study demonstrated that the interrelationships between efficiency and competition are significant and negative.