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Bank Competition, Risk and Asset Allocations

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  • John H. Boyd
  • Gianni De Nicoló
  • Abu M. Jalal
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    Abstract

    We study a banking model in which banks invest in a riskless asset and compete in both deposit and risky loan markets. The model predicts that as competition increases, both loans and assets increase; however, the effect on the loans-to-assets ratio is ambiguous. Similarly, as competition increases, the probability of bank failure can either increase or decrease. We explore these predictions empirically using a cross-sectional sample of 2,500 U.S. banks in 2003, and a panel data set of about 2600 banks in 134 non-industrialized countries for the period 1993-2004. With both samples, we find that banks'' probability of failure is negatively and significantly related to measures of competition, and that the loan-to-asset ratio is positively and significantly related to measures of competition. Furthermore, several loan loss measures commonly employed in the literature are negatively and significantly related to measures of bank competition. Thus, there is no evidence of a trade-off between bank competition and stability, and bank competition seems to foster banks'' willingness to lend.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/143.

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    Length: 35
    Date of creation: 01 Jul 2009
    Date of revision:
    Handle: RePEc:imf:imfwpa:09/143

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    Related research

    Keywords: Asset management; Banking; Bankruptcy; Banks; Credit risk; Depositories; Economic models; bank failure; probability; bank competition; risk of bank failure; samples; bank risk; correlation; return on assets; statistics; predictions; equation; logarithm; bank size; bank assets; bank failures; banking markets; standard deviation; banking systems; standard errors; bank profits; time series; banking services; interest expense; correlations; banking sector; banking stability; survey; random component; independent variable; income statement; branch banking; bank markets; banks ? loan; independent variables; bank deposits; bank balance sheet; empirical measure; proxy measure; banking market; estimation method; deposit insurance; prediction; sample size; bank loans; bank lending; bank holding companies; prudential regulation; econometrics; banks ? asset; standard deviations; bank risk-taking; instrumental variables; statistic; computations; computation; banking industry; probability of default; bank loan; bank funding; bank capital; outlier; bank market; confidence intervals; banking facilities; bank branch; deposit insurance premium; estimation procedure; banking model; bank consolidation; insurance premium; autocorrelation; bank services; financial risk; probabilities; bank indonesia; bank holding; equations; bank risk taking; bank default; measurement error;

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    References

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    Cited by:
    1. Aoki, Kosuke & Nikolov, Kalin, 2012. "Bubbles, banks and financial stability," Working Paper Series 1495, European Central Bank.
    2. Yu Sun, 2011. "Recent Developments in European Bank Competition," IMF Working Papers 11/146, International Monetary Fund.

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