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Loan Market Competition and Bank Risk-Taking

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  • Wolf Wagner

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Abstract

Recent literature (Boyd and De Nicoló, 2005) has argued that competition in the loan market lowers bank risk by reducing the risk-taking incentives of borrowers. We show that the impact of loan market competition on banks is reversed if banks can adjust their loan portfolios. The reason is that when borrowers become safer, banks want to offset the effect on their balance sheet and switch to higher-risk lending. They even overcompensate the effect of safer borrowers because loan market competition erodes their franchise values and thus increases their risk-taking incentives.

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File URL: http://hdl.handle.net/10.1007/s10693-009-0073-8
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Bibliographic Info

Article provided by Springer in its journal Journal of Financial Services Research.

Volume (Year): 37 (2010)
Issue (Month): 1 (February)
Pages: 71-81

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Handle: RePEc:kap:jfsres:v:37:y:2010:i:1:p:71-81

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Web page: http://www.springerlink.com/link.asp?id=102934

Related research

Keywords: Loan market competition; Risk shifting; Bank stability; G21; L11;

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References

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  1. John H. Boyd & Gianni De Nicolã, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, 06.
  2. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  3. Repullo, Rafael, 2003. "Capital Requirements, Market Power and Risk-Taking in Banking," CEPR Discussion Papers 3721, C.E.P.R. Discussion Papers.
  4. Thakor, Anjan V., 2000. "Relationship Banking," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 3-5, January.
  5. David Martinez-Miera & Rafael Repullo, 2010. "Does Competition Reduce the Risk of Bank Failure?," Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3638-3664, October.
  6. Giovanni Dell'Ariccia & Robert Marquez, 2006. "Lending Booms and Lending Standards," Journal of Finance, American Finance Association, vol. 61(5), pages 2511-2546, October.
  7. Gianni De Nicoló & Abu M. Jalal & John H. Boyd, 2006. "Bank Risk-Taking and Competition Revisited," IMF Working Papers 06/297, International Monetary Fund.
  8. Dell'Ariccia, Giovanni & Marquez, Robert, 2004. "Information and bank credit allocation," Journal of Financial Economics, Elsevier, vol. 72(1), pages 185-214, April.
  9. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
  10. Robert Hauswald & Robert Marquez, 2006. "Competition and Strategic Information Acquisition in Credit Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 967-1000.
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Citations

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Cited by:
  1. Eva Schliephake & Roland Kirstein, 2010. "Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition," FEMM Working Papers 100012, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  2. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2012. "How does bank competition affect systemic stability ?," Policy Research Working Paper Series 5981, The World Bank.
  3. Stefan Arping, 2014. "Does Competition make Banks more Risk-seeking?," Tinbergen Institute Discussion Papers 14-059/IV, Tinbergen Institute.
  4. Tabak, Benjamin M. & Fazio, Dimas M. & Cajueiro, Daniel O., 2012. "The relationship between banking market competition and risk-taking: Do size and capitalization matter?," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3366-3381.
  5. Beck, T.H.L. & De Jonghe, O.G. & Schepens, G., 2011. "Bank Competition and Stability: Cross-country Heterogeneity (Replaced by CentER DP 2012-085)," Discussion Paper 2011-080, Tilburg University, Center for Economic Research.
  6. Beck, T.H.L. & De Jonghe, O.G. & Schepens, G., 2012. "Bank Competition and Stability: Cross-country Heterogeneity (Revised version of CentER DP 2011-080)," Discussion Paper 2012-085, Tilburg University, Center for Economic Research.
  7. Francesco Marchionne & Alberto Zazzaro, 2013. "Rischio e concorrenza nel sistema bancario italiano durante la crisi finanziaria globale," Mo.Fi.R. Working Papers 86, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  8. Stefan Arping, 2012. "Banking Competition and Soft Budget Constraints: How Market Power can threaten Discipline in Lending," Tinbergen Institute Discussion Papers 12-146/IV/DSF49, Tinbergen Institute.
  9. Stefan Arping, 2012. "Banking Competition and Soft Budget Constraints: How Market Power can threaten Discipline in Lending," Tinbergen Institute Discussion Papers 12-146/IV/DSF49, Tinbergen Institute.
  10. T. Beck & O. De Jonghe & G. Schepens, 2011. "Bank competition and stability: cross-country heterogeneity," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/732, Ghent University, Faculty of Economics and Business Administration.
  11. Kick, Thomas & Prieto, Esteban, 2013. "Bank Risk Taking and Competition: Evidence from Regional Banking Markets," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79919, Verein für Socialpolitik / German Economic Association.
  12. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2014. "How does competition affect bank systemic risk?," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 1-26.

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