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Size, charter value and risk in banking: an international perspective

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Author Info
Gianni De Nicolo
Abstract

This paper documents the relationships between bank size and measures of charter value and insolvency risk in a sample of publicly traded banks in 21 industrialized countries for the 1988-1998 period. With the exception of small U.S. bank holding companies, charter values decrease in size and insolvency risk increases in size for most banks in the countries considered. Size-related diversification benefits and/or economies of scale in intermediation are either absent or, if they exist, are more than offset by banks' higher risk taking. Furthermore, banks operating in countries with more developed financial markets exhibit lower insolvency risk, and those operating in countries with either stricter regulation on banks' permissible activities or larger share of bank assets under state ownership exhibit higher insolvency risk. Overall, our evidence is at variance with some broad implications of modern financial intermediation theory, and suggests that absent future structural changes in banking markets of developed countries, bank consolidation is likely to result in an average increase in banks' insolvency risk.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 689.

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Date of creation: 2000
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Handle: RePEc:fip:fedgif:689

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Related research
Keywords: Bank size ; Banking structure;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hellwig, Martin, 1998. "Allowing for Risk Choices in Diamond's "Financial Intermediation as Delegated Monitoring"," Sonderforschungsbereich 504 Publications 98-04, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  2. Rafael La Porta & Florencio Lopezde-Silanes & Andrei Shleifer, 2000. "Government Ownership of Banks," NBER Working Papers 7620, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Rebecca S. Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 1-14. [Downloadable!]
  4. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, December.
  5. John H. Boyd & Chun Chang & Bruce D. Smith, 1998. "Deposit insurance: a reconsideration," Working Papers 593, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  6. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  7. Rebecca S. Demsetz & Marc R. Saidenberg, 1999. "Looking beyond the CEO: executive compensation at banks," Staff Reports 68, Federal Reserve Bank of New York. [Downloadable!]
  8. Hughes, Joseph P. & Lang, William W. & Mester, Loretta J. & Moon, Choon-Geol, 1999. "The dollars and sense of bank consolidation," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 291-324, February. [Downloadable!] (restricted)
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  9. Barth, James R. & Caprio, Gerard & Levine, Ross, 2000. "Banking systems around the globe : do regulation and ownership affect the performance and stability?," Policy Research Working Paper Series 2325, The World Bank. [Downloadable!]
  10. David A. Marshall & Edward S. Prescott, 2000. "Bank capital regulation with and without state-contingent penalties," Working Paper Series WP-00-10, Federal Reserve Bank of Chicago. [Downloadable!]
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  11. Philippe Aghion, Patrick Bolton & Steven Fries, 1999. "Optimal Design of Bank Bailouts: The Case of Transition Economies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 51-, March.
  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. [Downloadable!] (restricted)
    Other versions:
  13. Rebecca S. Demsetz & Philip E. Strahan, 1995. "Historical patterns and recent changes in the relationship between bank holding company size and risk," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 13-26. [Downloadable!]
  14. Mailath George J. & Mester Loretta J., 1994. "A Positive Analysis of Bank Closure," Journal of Financial Intermediation, Elsevier, vol. 3(3), pages 272-299, June. [Downloadable!] (restricted)
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  15. Krasa, Stefan & Villamil, Anne P, 1992. "A Theory of Optimal Bank Size," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 725-49, October. [Downloadable!] (restricted)
  16. Kareken, John H & Wallace, Neil, 1978. "Deposit Insurance and Bank Regulation: A Partial-Equilibrium Exposition," Journal of Business, University of Chicago Press, vol. 51(3), pages 413-38, July. [Downloadable!] (restricted)
  17. John H. Boyd & Edward C. Prescott, 1985. "Financial intermediary-coalitions," Staff Report 87, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  18. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
  19. Sleet, Christopher & Smith, Bruce D, 2000. "Deposit Insurance and Lender-of-Last-Resort Functions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 518-75, August.
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Edward S. Prescott, 2001. "Regulating bank capital structure to control risk," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 35-52. [Downloadable!]
  2. Gianni De Nicoló & John H. Boyd & Abu M. Jalal, 2007. "Bank Risk-Taking and Competition Revisited: New Theory and New Evidence," IMF Working Papers 06/297, International Monetary Fund. [Downloadable!]
  3. Eduardo Levy Yeyati & Alejandro Micco, 2003. "Concentración y penetración foránea en los sectores bancarios latinoamericanos: repercusiones sobre la competencia y el riesgo," RES Working Papers 4354, Inter-American Development Bank, Research Department. [Downloadable!]
  4. Pablo Druck & Raul Susmel & Ritu Basu & David Marston, 2004. "Bank Consolidation and Performance: The Argentine Experience," IMF Working Papers 04/149, International Monetary Fund. [Downloadable!]
  5. Beck, Thorsten & Laeven, Luc, 2006. "Resolution of failed banks by deposit insurers : cross-country evidence," Policy Research Working Paper Series 3920, The World Bank. [Downloadable!]
  6. Gianni De Nicoló & Philip F. Bartholomew & Jahanara Zaman & M. G. Zephirin, 2003. "Bank Consolidation, Internationalization and Conglomeration: Trends and Implications for Financial Risk," IMF Working Papers 03/158, International Monetary Fund. [Downloadable!]
  7. De Nicolo, Gianni & Honohan, Patrick & Ize, Alain, 2003. "Dollarization of the banking system : good or bad?," Policy Research Working Paper Series 3116, The World Bank. [Downloadable!]
    Other versions:
  8. Gianni De Nicoló & Dmitriy Rozhkov & Sami Geadah, 2003. "Financial Development in the CIS-7 Countries: Bridging the Great Divide," IMF Working Papers 03/205, International Monetary Fund. [Downloadable!]
  9. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2005. "Bank Concentration and Fragility: Impact and Mechanics," NBER Working Papers 11500, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Beck, Thorsten, 2008. "Bank competition and financial stability : friends or foes ?," Policy Research Working Paper Series 4656, The World Bank. [Downloadable!]
  11. Gianni De Nicoló & John H. Boyd, 2003. "Bank Risk-Taking and Competition Revisited," IMF Working Papers 03/114, International Monetary Fund. [Downloadable!]
  12. Fotios Pasiouras, 2008. "International evidence on the impact of regulations and supervision on banks’ technical efficiency: an application of two-stage data envelopment analysis," Review of Quantitative Finance and Accounting, Springer, vol. 30(2), pages 187-223, February. [Downloadable!] (restricted)
  13. Hakenes, Hendrik & Schnabel, Isabel, 2004. "Banks without Parachutes -- Competitive Effects of Government Bail-out Policies," Sonderforschungsbereich 504 Publications 04-53, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
    Other versions:
  14. Gianni De Nicoló & John H. Boyd & Abu M. Jalal, 2009. "Bank Competition, Risk and Asset Allocations," IMF Working Papers 09/143, International Monetary Fund. [Downloadable!]
  15. Andrea M. Maechler & Sandra Marcelino & Paulo Flavio Nacif Drummond, 2007. "Italy-Assessing Competition and Efficiency in the Banking System," IMF Working Papers 07/26, International Monetary Fund. [Downloadable!]
  16. Eduardo Levy Yeyati & Alejandro Micco, 2003. "Concentration and Foreign Penetration in Latin American Banking Sectors: Impact on Competition and Risk," RES Working Papers 4353, Inter-American Development Bank, Research Department. [Downloadable!]
    Other versions:
  17. Andrea M. Maechler & Srobona Mitra & DeLisle Worrell, 2007. "Decomposing Financial Risks and Vulnerabilities in Eastern Europe," IMF Working Papers 07/248, International Monetary Fund. [Downloadable!]
  18. Carol Ann Northcott, 2004. "Competition in Banking: A Review of the Literature," Working Papers 04-24, Bank of Canada. [Downloadable!]
  19. Beck , Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2009. "Financial institutions and markets across countries and over time - data and analysis," Policy Research Working Paper Series 4943, The World Bank. [Downloadable!]
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This page was last updated on 2009-12-9.

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