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How does competition affect bank risk-taking?

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  • Jiménez, Gabriel
  • Lopez, Jose A.
  • Saurina, Jesús

Abstract

A common assumption in the academic literature and in the supervision of banking systems is that franchise value plays a key role in limiting bank risk-taking. As market power is the primary source of franchise value, reduced competition in banking markets has been seen as promoting banking stability. A recent paper by Martínez-Miera and Repullo (MMR, 2010) shows that a nonlinear relationship theoretically exists between bank competition and risk-taking in the loan market. We test this hypothesis using data from the Spanish banking system. After controlling for macroeconomic conditions and bank characteristics, we find support for this nonlinear relationship using standard measures of market concentration in both the loan and deposit markets. When direct measures of market power, such as Lerner indices, are used, the empirical results are more supportive of the original franchise value hypothesis, but only in the loan market. Overall, the results highlight the empirical relevance of the MMR model, even though further analysis across other banking markets is needed.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 9 (2013)
Issue (Month): 2 ()
Pages: 185-195

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Handle: RePEc:eee:finsta:v:9:y:2013:i:2:p:185-195

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Web page: http://www.elsevier.com/locate/jfstabil

Related research

Keywords: Bank competition; Franchise value; Lerner index; Credit risk; Financial stability;

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References

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Citations

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Cited by:
  1. Samantas, Ioannis, 2013. "Bank competition and financial (in)stability in Europe: A sensitivity analysis," MPRA Paper 51621, University Library of Munich, Germany.
  2. Fang, Yiwei & Hasan, Iftekhar & Marton, Katherin, 2014. "Institutional development and bank stability: Evidence from transition countries," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 160-176.
  3. Uluc Aysun, 2013. "Bank size and macroeconomic shock transmission: Are there economic volatility gains from shrinking large, too big to fail banks?," Working Papers, University of Central Florida, Department of Economics 2013-02, University of Central Florida, Department of Economics.
  4. Cubillas, Elena & González, Francisco, 2014. "Financial liberalization and bank risk-taking: International evidence," Journal of Financial Stability, Elsevier, Elsevier, vol. 11(C), pages 32-48.
  5. Vollmer, Uwe & Wiese, Harald, 2013. "Minimum capital requirements, bank supervision and special resolution schemes. Consequences for bank risk-taking," Journal of Financial Stability, Elsevier, Elsevier, vol. 9(4), pages 487-497.

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