How Does Bank Competition Affect Solvency, Liquidity and Credit Risk? Evidence from the MENA Countries

By Raja Almarzoqi, Sami Ben Naceur, Alessandro Scopelliti

September 29, 2015

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Raja Almarzoqi, Sami Ben Naceur, and Alessandro Scopelliti. How Does Bank Competition Affect Solvency, Liquidity and Credit Risk? Evidence from the MENA Countries, (USA: International Monetary Fund, 2015) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper analyzes the relationship between bank competition and stability, with a specific focus on the Middle East and North Africa. Price competition has a positive effect on bank liquidity, as it induces self-discipline incentives on banks for the choice of bank funding sources and for the holding of liquid assets. On the other hand, price competition may have a potentially negative impact on bank solvency and on the credit quality of the loan portfolio. More competitive banks may be less solvent if the potential increase in the equity base—due to capital adjustments—is not large enough to compensate for the reduction in bank profitability. Also, banks subject to stronger competitive pressures may have a higher rate of nonperforming loans, if the increase in the risk-taking incentives from the lender’s side overcomes the decrease in the credit risk from the borrower’s side. In both cases, country-specific policies for market entry conditions—and for bank regulation and supervision—may significantly affect the sign and the size of the relationship. The paper suggests policy reforms designed to improve market contestability and to increase the quality and independence of prudential supervision.

Subject: Bank solvency, Banking, Competition, Credit risk, Financial institutions, Financial markets, Financial regulation and supervision, Financial sector policy and analysis, Financial services, Islamic banking, Nonperforming loans

Keywords: Bank assets, Bank capital, Bank capital ratio, Bank competition, Bank liquidity, Bank market power, Bank portfolio, Bank regulation, Bank risk, Bank solvency, Competition, Credit Risk, Decisions bank, East Africa, Global, Incumbent bank, Islamic banking, Liquidity, Liquidity position, Market share, Middle East, Nonperforming loans, North Africa, Solvency, Supervision, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/210
Stock No:

WPIEA2015210
ISBN:

9781513581910
ISSN:

1018-5941

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