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Bank ownership, market structure, and risk

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Author Info

  • Gianni De Nicolo
  • Elena Loukoianova

Abstract

This paper presents a model of a banking industry with heterogeneous banks that delivers predictions on the relationship between banks' risk of failure, market structure, bank ownership, and banks' screening and bankruptcy costs. These predictions are explored empirically using a panel of individual banks data and ownership information including more than 10,000 bank-year observations for 133 non-industrialized countries during the 1993-2004 period. Four main results obtain. First, the positive and significant relationship between bank concentration and bank risk of failure found in Boyd, De Nicol� and Al Jalal (2006) is stronger when bank ownership is taken into account, and it is strongest when state-owned banks have sizeable market shares. Second, conditional on country and firm specific characteristics, the risk profiles of foreign (state-owned) banks are significantly higher than (not significantly different from) those of private domestic banks. Third, private domestic banks do take on more risk as a result of larger market shares of both state-owned and foreign banks. Fourth, the model rationalizes this evidence if both state-owned and foreign banks have either larger screening and/or lower bankruptcy costs than private domestic banks, banks' differences in market shares, screening or bankruptcy costs are not too large, and loan markets are sufficiently segmented across banks of different ownership.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Proceedings with number 1058.

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Length: 377-3395
Date of creation: 2007
Date of revision:
Publication status: Published in Conference on Bank Structure and Competition (2007: 43rd) ; The Mixing of Banking & Commerce
Handle: RePEc:fip:fedhpr:1058

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Related research

Keywords: Banking market ; Banking structure;

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Cited by:
  1. John Boyd & Gianni De Nicolò & Elena Loukoianova, 2010. "Banking Crises and Crisis Dating: Theory and Evidence," CESifo Working Paper Series 3134, CESifo Group Munich.
  2. Fiordelisi, Franco & Mare, Davide Salvatore, 2014. "Competition and financial stability in European cooperative banks," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 1-16.
  3. Xavier Vives, 2010. "Competition and Stability in Banking," CESifo Working Paper Series 3050, CESifo Group Munich.
  4. Di Nicolo, G. & Lucchetta, M., 2010. "Financial Intermediation, Competition, and Risk: A General Equilibrium Exposition," Discussion Paper 2010-67S, Tilburg University, Center for Economic Research.
  5. Craig, Ben R. & Dinger, Valeriya, 2013. "Deposit market competition, wholesale funding, and bank risk," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3605-3622.
  6. Fungacova, Zuzana & Solanko, Laura, 2008. "Risk-taking by Russian banks: Do location, ownership and size matter?," BOFIT Discussion Papers 21/2008, Bank of Finland, Institute for Economies in Transition.
  7. Horst Gischer & Toni Richter, 2011. "'Global Player' im Bankenwesen - ökonomisch sinnvoll oder problembehaftet?," FEMM Working Papers 110012, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  8. Fungacova, Zuzana & Weill, Laurent, 2009. "How market power influences bank failures: Evidence from Russia," BOFIT Discussion Papers 12/2009, Bank of Finland, Institute for Economies in Transition.
  9. Olga Pak & Mira Nurmakhanova, 2013. "The Effect of Market Power on Bank Credit Risk-Taking and Bank Stability in Kazakhstan," Transition Studies Review, Springer, vol. 20(3), pages 335-350, November.
  10. Burcu Aydin, 2008. "Banking Structure and Credit Growth in Central and Eastern European Countries," IMF Working Papers 08/215, International Monetary Fund.

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