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Competition's Effect: Unveiling the Simultaneous Relationship between Risk and Cost of Financial Intermediation

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  • Md Mohiuddin Chowdhury
  • Changjun Zheng
  • Anupam Das Gupta
  • Atta Ullah

Abstract

This study examines the simultaneous association between risk and cost of financial intermediation (CoFI) by examining the effect of competition at different high-average-low levels from 2010 to 2021. The empirical findings of the two-step system generalized method of moments (2GMM) depict few significant insights based on 44 commercial banks in Bangladesh. The study finds that risk and CoFI are inversely related to each other in the short run and positively associated in the long run. Moreover, competition shows a heterogenous effect on risk and CoFI in both the short and long. However, in the long run, in a competitive market, incremental risk enhances CoFI, but a high CoFI target also increases risk. Finally, considering the CoFI, the average level of CoFI reduces the risk; however, considering risk, the high-risk and low-risk levels can enhance CoFI. Level of competition advocates average competition since it increases the cost of intermediation and reduces risk. Also, in average-level competition, incremental risk significantly increases the CoFI. This study provides a banking balancing act of risk-return tradeoff and Structure-Conduct-Performance (SCP) paradigm policy implications for emerging nations' financial system growth. Â JEL classification numbers: C30, C50, G21, G32.

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  • Md Mohiuddin Chowdhury & Changjun Zheng & Anupam Das Gupta & Atta Ullah, 2024. "Competition's Effect: Unveiling the Simultaneous Relationship between Risk and Cost of Financial Intermediation," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 14(5), pages 1-4.
    • Handle: RePEc:spt:apfiba:v:14:y:2024:i:5:f:14_5_4
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    More about this item

    Keywords

    Cost of Financial Intermediation; Risk Management; Competition; Two-step system GMM; Simultaneous relationship.;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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