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Fresh evidence on the relationship between market power and default risk of Indian banks

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  • Khan, Mohammad Azeem
  • Ahmad, Wasim

Abstract

In a uniquely designed empirical set-up involving a large set of Indian banks, this study establishes the relationship between market-based measures of default risk represented by Distance-to-Default (DD) and Distance-to-Capital (DC), and the market power reflected through the efficiency-based Lerner index. The results exhibit an inverse relationship between bank market power and bank default risk. Gross Nonperforming Assets (GNPAs), economic growth, and stock market volatility appear as other significant determinants of bank default risk. In the Indian context, this is the first study that utilizes a bank risk measure that incorporates the capital adequacy thresholds embedded under the revised Prompt Corrective Action (PCA) framework.

Suggested Citation

  • Khan, Mohammad Azeem & Ahmad, Wasim, 2022. "Fresh evidence on the relationship between market power and default risk of Indian banks," Finance Research Letters, Elsevier, vol. 46(PA).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pa:s1544612321003639
    DOI: 10.1016/j.frl.2021.102360
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    Cited by:

    1. Rakshit, Bijoy & Bardhan, Samaresh, 2023. "Does bank competition affect the transmission mechanism of monetary policy through bank lending channel? Evidence from India," Journal of Asian Economics, Elsevier, vol. 86(C).
    2. Ahmad, Wasim & Tiwari, Shiv Ratan & Wadhwani, Akshay & Khan, Mohammad Azeem & Bekiros, Stelios, 2023. "Financial networks and systemic risk vulnerabilities: A tale of Indian banks," Research in International Business and Finance, Elsevier, vol. 65(C).
    3. Dibooglu, Sel & Cevik, Emrah I. & Tamimi, Hussein A. Hassan Al, 2022. "Credit default risk in Islamic and conventional banks: Evidence from a GARCH option pricing model," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 396-411.
    4. Khan, Habib Hussain, 2022. "Bank competition, financial development and macroeconomic stability: Empirical evidence from emerging economies," Economic Systems, Elsevier, vol. 46(4).

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    More about this item

    Keywords

    Distance-to-default; Distance-to-capital; Efficiency-based Lerner index; Generalised method of moment; Scheduled commercial banks;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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