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Does Competition Reduce The Risk Of Bank Failure?

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  • Rafael Repullo

    ()
    (CEMFI, Centro de Estudios Monetarios y Financieros)

  • David Martínez-Miera

    ()
    (CEMFI, Centro de Estudios Monetarios y Financieros)

Abstract

A large theoretical literature shows that competition reduces banks’ franchise values and induces them to take more risk. Recent research contradicts this result: When banks charge lower rates, their borrowers have an incentive to choose safer investments, so they will in turn be safer. However, this argument does not take into account the fact that lower rates also reduce the banks’ revenues from non-defaulting loans. This paper shows that when this effect is taken into account, a U-shaped relationship between competition and the risk of bank failure generally obtains.

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Bibliographic Info

Paper provided by CEMFI in its series Working Papers with number wp2008_0801.

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Date of creation: Jan 2008
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Handle: RePEc:cmf:wpaper:wp2008_0801

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Keywords: Bank competition; bank failure; credit risk; loan rates; loan defaults; default correlation; net interest income; moral hazard risk-shifting; franchise values.;

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References

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  1. Zamarro, Gema, 2010. "Accounting for heterogeneous returns in sequential schooling decisions," Journal of Econometrics, Elsevier, vol. 156(2), pages 260-276, June.
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  3. Peñaranda, Francisco & Sentana, Enrique, 2007. "Duality in Mean-Variance Frontiers with Conditioning Information," CEPR Discussion Papers 6566, C.E.P.R. Discussion Papers.
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  8. Gagliarducci, Stefano & Nannicini, Tommaso & Naticchioni, Paolo, 2008. "Electoral Rules and Politicians’ Behavior: A Micro Test," IZA Discussion Papers 3348, Institute for the Study of Labor (IZA).
  9. Samuel Bentolila & Juan Jose Dolado & Juan F. Jimeno, 2007. "Does Immigration Affect the Phillips Curve? Some Evidence for Spain," CESifo Working Paper Series 2166, CESifo Group Munich.
  10. Perotti, Enrico C & Suarez, Javier, 2001. "Last Bank Standing: What Do I Gain if You Fail?," CEPR Discussion Papers 2933, C.E.P.R. Discussion Papers.
  11. Victor Aguirregabiria & Pedro mira, 2007. "Dynamic Discrete Choice Structural Models: A Survey," Working Papers tecipa-297, University of Toronto, Department of Economics.
  12. Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, vol. 44(1), pages 1-34, January.
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  16. Chiappori, Pierre-Andre & Perez-Castrillo, David & Verdier, Thierry, 1995. "Spatial competition in the banking system: Localization, cross subsidies and the regulation of deposit rates," European Economic Review, Elsevier, vol. 39(5), pages 889-918, May.
  17. 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.
  18. Gerard Llobet & Michael Manove, 2006. "Network Size And Network Capture," Working Papers wp2006_0604, CEMFI.
  19. Roberto Serrano, 2007. "Cooperative Games: Core And Shapley Value," Working Papers wp2007_0709, CEMFI.
  20. Laura Crespo, 2006. "Caring For Parents And Employment Status Of European Mid-Life Women," Working Papers wp2006_0615, CEMFI.
  21. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  22. Abel Elizalde & Rafael Repullo, 2007. "Economic and Regulatory Capital in Banking: What Is the Difference?," International Journal of Central Banking, International Journal of Central Banking, vol. 3(3), pages 87-117, September.
  23. Rafael Repullo, 2002. "Capital requirements, market power, and risk-taking in banking," Proceedings 809, Federal Reserve Bank of Chicago.
  24. Ceron, Jose A. & Suarez, Javier, 2006. "Hot and Cold Housing Markets: International Evidence," CEPR Discussion Papers 5411, C.E.P.R. Discussion Papers.
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