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When Banks Compete, What Happens to Firm Default Risk?

Sep 11
2 min read

Updated: Oct 9

When Banks Compete, What Happens to Firm Default Risk? Across five ASEAN emerging markets and 26,554 firm-year observations, stronger bank competition goes together with higher corporate default risk — because borrowing firms take on excessive risk, not because debt costs more. Duc Nguyen Nguyen and Canh Phuc Nguyen (HAPRI Senior Research Associate). A Vietnamese small-business owner and a visiting bank officer compare two open loan folders across a desk in a daylit office, a calculator between them, while a colleague checks terms on a laptop; plain wall space at upper right for the HAPRI logo.
When Banks Compete, What Happens to Firm Default Risk?

Bank competition is usually debated in terms of what it does to banks themselves. New HAPRI research turns the question around and asks what it does to the companies that borrow, finding that in five ASEAN emerging markets stronger bank competition goes together with higher corporate default risk.


Context

Decades of banking research have asked whether competition among banks makes the financial system safer or more fragile, and regulators have built much of their thinking about market structure on that debate. Far less is known about the other side of the lending relationship: what happens to the non-financial firms that borrow when the banks around them compete harder for their business.


That gap matters most in emerging markets, where bank credit is the dominant source of external finance for firms and where reforms have steadily opened banking sectors to more entrants. If competition changes how much risk borrowers take on, then the consequences of banking-sector reform reach well beyond bank balance sheets and into the corporate sector that policymakers are trying to support.


How the effect travels
How the effect travels

Methods

The study assembles a large panel of 26,554 firm-year observations covering listed non-financial firms in five ASEAN emerging markets — Indonesia, Malaysia, the Philippines, Thailand, and Vietnam — and relates measures of bank competition to firm-level corporate default risk. The authors then test the estimated relationship against a battery of robustness checks and examine the mechanisms that could link the two, including firms' risk-taking behaviour and their cost of debt.


Key findings

  • Across the five ASEAN markets, greater bank competition is associated with higher corporate default risk among non-financial firms.

  • That association is not an artefact of one particular specification — it survives an extensive set of robustness tests.

  • The channel runs through corporate behaviour: competition among banks appears to push non-financial firms toward excessive risk-taking, and that risk-taking is what shows up later as higher default risk.

  • The more familiar pricing explanation does not hold here: the study finds no evidence that bank competition raises firms' cost of debt in this setting.


Policy implications

The authors raise a cautious flag on banking regulations and policies that aim to enhance bank competition in the context of emerging markets. The authors write that appropriate macroprudential tools for both banks and clients should be considered to mitigate corporate risk taking, which leads to potential risk of default. The authors add that regulations fostering monitoring and market discipline should be implemented to eliminate moral hazards and risk taking behaviours of both banks and borrowers.

What moves, and what does not
What moves, and what does not

Keywords:

  • Bank Competition

  • Corporate Default Risk

  • Emerging Markets

  • ASEAN

  • Corporate Risk-Taking

  • Cost of Debt

Link:

Citation:

Nguyen, D. N., & Nguyen, C. P. (2026). When banks compete, what happens to firm default risk? New evidence from emerging markets. Heliyon, 12(12), e45186.

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