Market concentration, risk-taking, and bank performance: Evidence from emerging economies

- The “quiet life” hypothesis holds in the BRICs' banking markets.
- Banks taking a lower level of risk are more efficient.
- Chinese and Brazilian banks outperform Indian and Russian ones.
- The BRIC banks have recovered rapidly after the 2007-2008 financial crisis.

This paper investigates the relationship between market concentration, risk-taking, and bank performance using a unique dataset of the BRIC banks over the period 2003-2010. We find a negative association between market concentration and performance, in support of the “quiet life” hypothesis. We also find that banks taking a lower level of risks perform better, in favor of prudential practice. Moreover, the BRICs' banking sectors were all negatively affected by the 2007-2008 global financial crisis with China and Russia being the least and most affected, respectively. On average Chinese and Brazilian banks outperform Indian and Russian ones, indicating that China and Brazil have more favorable institutional infrastructure. These results are robust to alternative model specifications and estimation techniques. Our analysis may have important policy implications for bankers and regulators in the BRICs and other developing and transition countries.