Bank Competition and Risk-taking in the Iranian Banking Industry

Abstract: The banking industry is one of the main sectors of the economy of any country, that its health is a necessary condition to play a positive role in the economic development of that country. The health of the banking system is assessed by the financial stability criterion, which is evaluated by various risk-taking indexes. On the other hand, the banks risk-taking is affected by various factors, the most important of which is banking competition. The purpose of this study is to investigate the effect of banking competition on the risk-taking of the Iranian banking industry during the period 2009-2019. For this purpose, banking competition has been studied in the form of two main structural approaches (using the Herfindahl-Hirschman concentration index) and non-structural (using the Panzar-Rosse statistic). Z and NPL indexes have also been used as a criterion for assessing the banks risk-taking. According to the results, the concentration index calculated based on the total assets, total lending facilities and total deposits of the 19 banks under review had an almost declining trend, which indicates that the Iranian banking industry is moving towards competitive conditions, while the estimated Panzar-Rosse statistic indicates the existence of a monopolistic competition in the Iranian banking industry. According to the results, the effect of the three Herfindahl-Hirschman concentration indexes on banks chr('39')risk-taking is not always significant, while there is a non-linear U-shaped relationship between the Panzar-Rosse statistic and the banks level of risk-taking. This means that as the banking system becomes more competitive to some extent, the level of banks risk-taking decreases and then begins to increase. Also, according to the results, the level of competition in most years has been at a higher level than the optimal level. Therefore, it is recommended that in order to reduce the banks level of risk-taking, banking policies should be designed in such a way as to reduce the level of competition to an optimal level.