Competition–risk nexus of Taiwanese banks: from a stability–inefficiency perspective

Abstract

Purpose: This study investigates the competition–risk nexus for Taiwan’s banking industry from the stability–inefficiency perspective over the period 2002–2021. Design/methodology/approach: This study investigates the effect of competition on bank risk from the perspective of stability inefficiency. Following Koetter et al. (2012), we measured bank competition levels by adjusting the Efficiency Lerner index. Findings: This finding supports the competition–stability hypothesis for the banking sector, which states that intensified competition reduces banks’ insolvency and credit risk, making the banking sector sounder. However, banks enjoy a “quiet life” environment and face less competition but still obtain high profits despite inefficiency. Originality/value: This study considers the moderating effects of multiple factors and finds that bank size, the revenue growth rate and new business income moderate the relationship between risk and competition. In addition, compared with the Z-score, this study investigates the competition–risk relationship through stability inefficiency, which was evaluated using the stochastic frontier approach, offering more robust results than previous studies.