Bank competition, risk taking and productive efficiency: Evidence from Nigeria’s banking reform experiments

Citation

Zhao T & Murinde V (2009) Bank competition, risk taking and productive efficiency: Evidence from Nigeria’s banking reform experiments. Stirling Economics Discussion Paper, 2009-23.

Abstract
We propose a three-stage procedure for investigating the interrelationships among bank competition, risk taking and efficiency. The procedure is applied to Nigeria’s banking reforms (1993-2008). Stage I measures bank productive efficiency, using Data Envelopment Analysis, and the evolution of bank competition, using Conjectural Variations (CV) methods. Stage II uses the CV estimates to test whether regulatory reforms influence bank competition. Stage III investigates the impact of the reforms and concomitant changes in competition on bank behaviour. The evidence suggests that deregulation and prudential re-regulation influence bank risk taking and bank productive efficiency directly (direct impact) and via their impact on competition (indirect impact). Further, it is found that as competition increases, excessive risk taking decreases and efficiency increases. Overall, the evidence affirms policies that foster bank competition, at least in the Nigerian context.

Keywords
bank competition; bank efficiency; risk-taking; Nigeria; Nigeria Foreign economic relations.; Nigeria Economic conditions.; Competition, International

JEL codes

• G21: Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• D43: Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
• C51: Model Construction and Estimation