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The Conditional Effects of Market Power on Bank Risk—Cross-Country Evidence

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  • Jens Forssbæck
  • Choudhry Tanveer Shehzad

Abstract

We investigate the relationship between market power and risk for a large panel of banks worldwide. Loan and deposit market power are measured separately at bank-year level, and the risk effect of market power is conditioned on several factors predicted by theory. Both loan and deposit market power have a stable, monotonically negative effect on risk, irrespective of risk measure. The effect is larger for asset risk, and is independent of charter value and capital ratios. The effect on default risk tends to decrease in the quality of banking regulation, whereas the conditioning effects of deposit insurance protection are mixed.

Suggested Citation

  • Jens Forssbæck & Choudhry Tanveer Shehzad, 2015. "The Conditional Effects of Market Power on Bank Risk—Cross-Country Evidence," Review of Finance, European Finance Association, vol. 19(5), pages 1997-2038.
    • Handle: RePEc:oup:revfin:v:19:y:2015:i:5:p:1997-2038.
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