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How Does Competition Impact Bank Risk-Taking?

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  • Gabriel Jiménez

    ()
    (Banco de España)

  • Jose A. Lopez

    ()
    (Federal Reserve Bank Of San Francisco)

  • Jesús Saurina

    ()
    (Banco de España)

Abstract

A common assumption in the academic literature 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. We test this hypothesis using data for the Spanish banking system. We find that standard measures of market concentration do not affect bank risk-taking. However, we find a negative relationship between market power measured using Lerner indexes based on bank-specific interest rates and bank risk. Our results support the franchise value paradigm.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/10/Fic/dt1005e.pdf
File Function: First version, March 2010
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1005.

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Length: 38 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:bde:wpaper:1005

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Keywords: bank competition; franchise value; Lerner index; credit risk; financial stability;

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  1. Yeyati, Eduardo Levy & Micco, Alejandro, 2007. "Concentration and foreign penetration in Latin American banking sectors: Impact on competition and risk," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(6), pages 1633-1647, June.
  2. Martinez-Miera, David & Repullo, Rafael, 2008. "Does Competition Reduce the Risk of Bank Failure?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6669, C.E.P.R. Discussion Papers.
  3. Gianni De Nicoló & Abu M. Jalal & John H. Boyd, 2006. "Bank Risk-Taking and Competition Revisited," IMF Working Papers 06/297, International Monetary Fund.
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  9. Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Information Reusability, Competition and Bank Asset Quality," Finance, EconWPA 0411049, EconWPA.
  10. Alfredo Martín-Oliver & Vicente Salas-Fumás & Jesus Saurina, 2007. "A Test of the Law of One Price in Retail Banking," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(8), pages 2021-2040, December.
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  12. Berger, Allen N, et al, 2004. "Bank Concentration and Competition: An Evolution in the Making," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(3), pages 433-51, June.
  13. Claessens, Stijn & Laeven, Luc, 2004. "What Drives Bank Competition? Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(3), pages 563-83, June.
  14. Franklin Allen & Douglas Gale, 2004. "Competition and financial stability," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 453-486.
  15. Vicente Salas & Jesús Saurina, 2002. "Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks," Journal of Financial Services Research, Springer, Springer, vol. 22(3), pages 203-224, December.
  16. Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, Elsevier, vol. 44(1), pages 1-34, January.
  17. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Bank concentration and crises," Policy Research Working Paper Series 3041, The World Bank.
  18. Marcello Bofondi & Giorgio Gobbi, 2004. "Bad Loans and Entry into Local Credit Markets," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 509, Bank of Italy, Economic Research and International Relations Area.
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