Bank Risk, Capital Adequacy and Banking Market Concentration – A Global Study

Abstract

We examine the dynamic relationship between banking sector capital adequacy, competition, and financial risk in an extensive global macro-financial dataset of 220 countries covering the years 1998 to 2021, using Generalised Method of Moments (GMM) and Logit models. Developing from the earlier work by Davis et al (2020), the study underlines not only the essential role of capital adequacy measured with and without risk adjustment in reducing financial risk, but also the key influence of competition as proxied by market structure in influencing financial stability. Macroeconomic factors such as GDP growth, inflation, and unemployment are also shown to have an important effect on bank risk. The findings offer crucial perspectives for policymakers and regulators, emphasising the need of strict capital regulation that considers regional and historical economic factors as well as banking market structure in order to enhance the resilience of the banking industry and reduce the risk of financial crises.