The purpose of this paper is to investigate the impact of competition on credit risk, liquidity risk, capital risk and insolvency risk in the Chinese banking industry during the period 2003-2013.
This study uses a generalized method of moments system estimator to examine the impact of competition on risk. In particular, translog specifications are used to measure the competition and insolvency risk.
The results show that greater competition within each bank ownership type (state-owned commercial banks, joint-stock commercial banks and city commercial banks) leads to higher credit risk, higher liquidity risk, higher capital risk, but lower insolvency risk.
This paper is the first piece of research testing the impact of competition on different types of risk in banking industry and it further contributes to the empirical literature by using a more accurate competition indicator (efficiency-adjusted Lerner index) and a more precise insolvency risk indicator (stability inefficiency).
