Bank concentration and financial risk in jordan

Abstract

The main aim of this paper is to investigate the relationship between bank concentration and bank risk in the Jordanian banking industry from 2005 to 2016. While controlling for bank fundamen-tals and business cycle, we used two measurements to measure bank risk (Z-score and Non-performing loan ratio) and three measurements of bank concentration (Herfindahl–Hirschmann Index, Concentration Ratio and the Lerner Index). We applied the two-step Generalized Method of Moments (GMM) to analysis this relationship between concentration and risk. The empirical evidence shows bank concentration has a positive relationship with risk measured using non-performing loan ratio, and a negative relationship using Z-score. This suggests greater market power leads to greater risks, which in turn supports the concentration-fragility theory.