The effect of competition on banks' risk-taking behavior in the banking sector -OECD countries practice-

Competition and risk issues, which have a multidisciplinary structure, are encountered in almost every field where people are present. With the advancement of technology, the perspective on these concepts naturally develops and changes day by day. Studies on competition and risk-taking behavior in the banking sector, one of the most important sectors it affects, have maintained their popularity from past to present. The main objective of this study is to provide new evidence on the relationship between competition and risk-taking behavior in banks using bank data. In addition, the study examines whether the level of financial development has an impact on the risk of competition. In this context, the study is the first of its kind in the literature. A comprehensive study was conducted by including 6,478 banks operating in OECD member countries and the data set used covers the period 2013-2021. According to the findings of the panel data analysis, the findings obtained between competition measured by both CR5 and HHI variables and risk-taking behavior measured by Z-SCOR variable are consistent with Boyd and De Nicolo's (2005) "Competition-stability" view. That is, increased competition decreases risk-taking behavior in banks and thus increases stability. The results are also consistent with the "nonlinear" view of Martinez- Miera and Repullo (2010). According to this view, there is a non-linear relationship between competition and risk-taking behavior and, in fact, banks act in accordance with the position they have taken according to the state of the industry. While increased competition may initially increase risk-taking behavior, it may reduce or offset risk-taking behavior when it reaches very high levels.