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Bank Ownership, Market Structure and Risk

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  • Gianni De Nicoló
  • 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 Nicolò 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 International Monetary Fund in its series IMF Working Papers with number 07/215.

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Length: 44
Date of creation: 01 Sep 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/215

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Keywords: Banks; Corporate sector; Financial risk; Bankruptcy; Industrial structure; foreign banks; domestic banks; bank ownership; bank risk; market structure; banking; foreign bank; financial stability; bank asset; banking systems; bank for international settlements; banking industry; direct investment; net interest margin; financial sector; segmentation; bank risk taking; bank capitalization; banks ? loan; bank responses; banking services; banking markets; bank competition; increased competition; banking crises; banking industries; bank assets; foreign entry; bank privatization; bank lending; bank consolidation; bank classification; insurance premium; banking system; bank subsidiary; competitive conditions; financial institutions; bank structure; negative relationship; bank default; bank performance;

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Cited by:
  1. Craig, B.R. & Dinger, V., 2010. "Deposit Market Competition, Wholesale Funding, and Bank Risk," Discussion Paper 2010-65S, Tilburg University, Center for Economic Research.
  2. 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.
  3. Xavier Vives, 2010. "Competition and Stability in Banking," Working Papers Central Bank of Chile 576, Central Bank of Chile.
  4. 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.
  5. 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.
  6. Burcu Aydin, 2008. "Banking Structure and Credit Growth in Central and Eastern European Countries," IMF Working Papers 08/215, International Monetary Fund.
  7. Elena Loukoianova & Gianni De Nicoló & John H. Boyd, 2009. "Banking Crises and Crisis Dating," IMF Working Papers 09/141, International Monetary Fund.
  8. Zuzana Fungacova & Laurent Weill, 2010. "How Market Power Influences Bank Failures Evidence from Russia," Working Papers of LaRGE Research Center 2010-08, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  9. 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.
  10. 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.

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