How Does Competition Impact Bank Risk-Taking?
AbstractA 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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Bibliographic InfoPaper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1005.
Length: 38 pages
Date of creation: Mar 2010
Date of revision:
bank competition; franchise value; Lerner index; credit risk; financial stability;
Other versions of this item:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-11 (All new papers)
- NEP-BAN-2010-04-11 (Banking)
- NEP-BEC-2010-04-11 (Business Economics)
- NEP-COM-2010-04-11 (Industrial Competition)
- NEP-MIC-2010-04-11 (Microeconomics)
- NEP-RMG-2010-04-11 (Risk Management)
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