Bank Market Power and Risk Behavior under Composite Uncertainty: Threshold Panel Evidence from an Emerging Economy

Abstract

This study examines the nonlinear link between bank market power and financial risk under varying levels of macroeconomic uncertainty in an emerging market. Using data from 27 Vietnamese banks (2010–2023) and a composite uncertainty index spanning five systemic dimensions, a Panel Threshold Regression model uncovers a critical uncertainty threshold where the risk effect of market power reverses—amplifying risk in stable conditions but reducing it when uncertainty is high. This asymmetric effect is most evident in joint-stock and small banks, and weakens post-COVID-19. Robustness checks with non-performing loans validate the threshold dynamics. The study advances the literature by providing empirical evidence of a nonlinear market power–risk nexus, introducing a multidimensional uncertainty measure, and highlighting heterogeneity in bank responses by ownership and size. These findings challenge linear assumptions in competition–stability models and offer important implications for macroprudential policy in emerging financial systems.