Advanced Search
MyIDEAS: Login to save this paper or follow this series

Bank Organization, Market Structure and Risk Taking: Theory and Evidence from U.S. Commercial Banks

Contents:

Author Info

  • Martin Goetz
Registered author(s):

    Abstract

    This paper examines (1) the change in commercial banks’ risk taking as states in the United States removed restrictions on bank branching within state borders and (2) the channels through which the removal of these restrictions affect bank risk taking. I find that, after the liberalization of branching restrictions, banks that do not expand their branch network into other markets decrease risk taking, while expanding banks do not change risk taking. Existing theories, which focus on the importance of market structure on risk taking, are not able to explain this pattern. Therefore I provide a theoretical framework, building on theories from organizational economics, which can account for this by showing that non-expanding banks have a comparative advantage in lending to informationally difficult borrowers, which induces them to lower risk taking as competitors expand. Empirical evidence supports this channel and highlights the importance of borrower information, since nonexpanding banks decrease risk taking more as competitors expand if they operate in a county with more informationally difficult borrowers.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://indstate.edu/business/NFI/leadership/papers/2011-WP-11_Goetz.pdf
    File Function: Full text
    Download Restriction: no

    Bibliographic Info

    Paper provided by Indiana State University, Scott College of Business, Networks Financial Institute in its series NFI Working Papers with number 2011-WP-11.

    as in new window
    Length: 73 pages
    Date of creation: May 2011
    Date of revision:
    Handle: RePEc:nfi:nfiwps:2011-wp-11

    Contact details of provider:
    Postal: Postal: Federal Hall, 30 N. 7th St., Room 318, Terre Haute IN 47809
    Phone: 1-812-237-2158
    Fax: 1-812-237-4374
    Email:
    Web page: http://indstate.edu/business/nfi/
    More information through EDIRC

    Related research

    Keywords: Bank Risk; Market Structure; Organization; Regulation;

    Find related papers by JEL classification:

    References

    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.:
    as in new window
    1. Stijn Claessens & Luc Laeven, 2003. "Financial Development, Property Rights, and Growth," Journal of Finance, American Finance Association, American Finance Association, vol. 58(6), pages 2401-2436, December.
    2. Rafael Repullo & David Martínez-Miera, 2008. "Does Competition Reduce The Risk Of Bank Failure?," Working Papers, CEMFI wp2008_0801, CEMFI.
    3. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, American Finance Association, vol. 57(5), pages 1891-1921, October.
    4. Yuliya Demyanyk & Charlotte Ostergaard & Bent E. Sørensen, 2006. "FU.S. banking deregulation, small businesses, and interstate insurance of personal income," Working Paper, Norges Bank 2006/09, Norges Bank.
    5. Ramirez, Carlos D., 2003. "Did branch banking restrictions increase bank failures? Evidence from Virginia and West Virginia in the late 1920s," Journal of Economics and Business, Elsevier, Elsevier, vol. 55(4), pages 331-352.
    6. Timothy H. Hannan & Robin A. Prager, 2001. "The competitive implications of multimarket bank branching," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-43, Board of Governors of the Federal Reserve System (U.S.).
    7. Thorsten Beck & Ross Levine & Alexey Levkov, 2010. "Big Bad Banks? The Winners and Losers from Bank Deregulation in the United States," Journal of Finance, American Finance Association, American Finance Association, vol. 65(5), pages 1637-1667, October.
    8. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(1), pages 1-29, February.
    9. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, American Economic Association, vol. 92(4), pages 874-888, September.
    10. David C. Wheelock & Paul W. Wilson, 2000. "Why do Banks Disappear? The Determinants of U.S. Bank Failures and Acquisitions," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 127-138, February.
    11. Carlson, Mark & Mitchener, Kris James, 2006. "Branch Banking, Bank Competition, and Financial Stability," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(5), pages 1293-1328, August.
    12. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
    13. Bongini, Paola & Laeven, Luc & Majnoni, Giovanni, 2002. "How good is the market at assessing bank fragility? A horse race between different indicators," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(5), pages 1011-1028, May.
    14. Adam B. Ashcraft, 2004. "Are bank holding companies a source of strength to their banking subsidiaries?," Staff Reports, Federal Reserve Bank of New York 189, Federal Reserve Bank of New York.
    15. John H. Boyd & Gianni De Nicolã, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, American Finance Association, vol. 60(3), pages 1329-1343, 06.
    16. Pita Barros, Pedro, 1999. "Multimarket competition in banking, with an example from the Portuguese market," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 17(3), pages 335-352, April.
    17. Stephen A. Rhoades, 2000. "Bank mergers and banking structure in the United States, 1980-98," Staff Studies, Board of Governors of the Federal Reserve System (U.S.) 174, Board of Governors of the Federal Reserve System (U.S.).
    18. Astrid A. Dick, 2006. "Nationwide Branching and Its Impact on Market Structure, Quality, and Bank Performance," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 79(2), pages 567-592, March.
    19. Dell'Ariccia, Giovanni & Marquez, Robert, 2004. "Information and bank credit allocation," Journal of Financial Economics, Elsevier, Elsevier, vol. 72(1), pages 185-214, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nfi:nfiwps:2011-wp-11. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ray Thomas).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.