The role of strategic interactions in risk-taking behavior: A study from asset growth perspective

This study uses panel data on Vietnamese commercial banks from 2008 to 2018 in order to investigate the role of strategic interactions in determining bank risk-taking behavior by considering bank asset growth. The results suggest that aggressive competition is less favorable for banks striving for s...

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Bibliographic Details
Published in:International review of financial analysis 2022-07, Vol.82, p.102127, Article 102127
Main Authors: Le, Huong Nguyen Quynh, Nguyen, Thai Vu Hong, Schinckus, Christophe
Format: Article
Language:English
Subjects:
Asset growth
Bank risk-taking
Competitive strategy measure
Strategic interactions
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Summary:This study uses panel data on Vietnamese commercial banks from 2008 to 2018 in order to investigate the role of strategic interactions in determining bank risk-taking behavior by considering bank asset growth. The results suggest that aggressive competition is less favorable for banks striving for stability and that a high value of competitive strategy measure (as a proxy for strategic interactions) encourages risk-taking incentives. We also find that the distributional effects of strategic interaction on bank risk-taking because of asset growth reveal that the uncertainty in strategic-interaction-driven profits diminishes in banks with higher growth. This finding is consistent with the idea that when competition becomes more aggressive, bank restructuring should focus on increasing total assets by merging and acquiring small- and medium-sized banks to stabilize the banking sector. Furthermore, the results demonstrate that banks with low leverage or under regulatory pressure engage in more risk-taking. Therefore, policymakers may not implement a tighter capital requirement that contributes to a heightened level of risk. The results are robust to alternative measures of risk-taking and monetary policy stance as well as different econometric specifications. •A high value of competitive strategy measure (CSM) encourages bank risk-taking.•The asset growth mitigates the relationship between strategic interactions and risk-taking incentives.•This study reveals the mechanism that shapes risk-taking related to regulatory, macroeconomic, and bank-specific factors.
ISSN:1057-5219
1873-8079
DOI:10.1016/j.irfa.2022.102127