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Deposit market competition, wholesale funding, and bank risk

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  • Craig, Ben R.
  • Dinger, Valeriya

Abstract

Empirical research on the effect of bank competition on bank risk has so far produced very inconclusive results. In this paper we revisit this long-standing debate and propose a new empirical approach that is concentrated on the relationship between deposit market competition and bank risk. This approach closely follows the traditional theoretical views of the competition and risk relationship and is focused on testing the classical moral hazard problem of the bank: deposit market competition raises the optimal risk choice of the bank by raising the costs of bank liabilities. Since banks can substitute between retail and wholesale funding, we relate deposit market competition to wholesale market conditions and examine their joint effect on the risk of bank assets. The analysis is based on a unique, comprehensive dataset, which combines retail deposit rate data with data on bank characteristics and data on local deposit market features for a sample of 589 US banks. Our results support the notion of a risk-enhancing effect of deposit market competition.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:9:p:3605-3622
    DOI: 10.1016/j.jbankfin.2013.05.010
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    Cited by:

    1. Valeriya Dinger, 2015. "Bank Mergers and Deposit Rate Rigidity," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(1), pages 27-56, February.
    2. Tomas Klinger & Petr Teply, 2016. "The Nexus Between Systemic Risk and Sovereign Crises," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(1), pages 50-69, February.
    3. Sääskilahti, Jaakko, 2016. "Local bank competition and small business lending after the onset of the financial crisis," Journal of Banking & Finance, Elsevier, vol. 69(C), pages 37-51.
    4. repec:eee:ememar:v:32:y:2017:i:c:p:168-189 is not listed on IDEAS
    5. Kok, Christoffer & Gross, Marco & Żochowski, Dawid, 2016. "The impact of bank capital on economic activity - evidence from a mixed-cross-section GVAR model," Working Paper Series 1888, European Central Bank.
    6. M. Brei & L. Jacolin & A. Noah, 2018. "Credit risk and bank competition in Sub-Saharan Africa," Working papers 664, Banque de France.
    7. Alexander Guarín-López & Ignacio Lozano-Espitia, 2016. "Credit Funding and Banking Fragility: An Empirical Analysis for Emerging Economies," BORRADORES DE ECONOMIA 014306, BANCO DE LA REPÚBLICA.
    8. Jarko Fidrmuc & Philipp Schreiber & Martin Siddiqui, 2015. "The Transmission of Bank Funding to Corporate Loans: Deleveraging in Germany," Open Economies Review, Springer, vol. 26(3), pages 581-597, July.
    9. Olszak, Małgorzata & Pipień, Mateusz & Kowalska, Iwona & Roszkowska, Sylwia, 2014. "What drives heterogeneity of loan loss provisions’ procyclicality in the EU?," MPRA Paper 56834, University Library of Munich, Germany.
    10. Robin Dottling, 2018. "Bank Capital Regulation in a Zero Interest Environment," Tinbergen Institute Discussion Papers 18-016/IV, Tinbergen Institute, revised 11 Oct 2019.
    11. Ching-Wai (Jeremy) Chiu & John Hill, 2018. "The Rate Elasticity of Retail Deposits in the United Kingdom: A Macroeconomic Investigation," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 113-158, March.
    12. repec:eee:riibaf:v:41:y:2017:i:c:p:90-104 is not listed on IDEAS
    13. Chen, Minghua & Jeon, Bang Nam & Wang, Rui & Wu, Ji, 2015. "Corruption and bank risk-taking: Evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 24(C), pages 122-148.
    14. Fabiana Gomez & Jorge Ponce, 2014. "Bank Competition and Loan Quality," Journal of Financial Services Research, Springer;Western Finance Association, vol. 46(3), pages 215-233, December.
    15. repec:wsi:ijfexx:v:05:y:2018:i:03:n:s2424786318500172 is not listed on IDEAS
    16. repec:eee:ecofin:v:42:y:2017:i:c:p:668-681 is not listed on IDEAS
    17. repec:eee:finsta:v:40:y:2019:i:c:p:132-143 is not listed on IDEAS
    18. repec:spr:elcore:v:19:y:2019:i:1:d:10.1007_s10660-018-9291-1 is not listed on IDEAS
    19. repec:eee:ememar:v:38:y:2019:i:c:p:310-325 is not listed on IDEAS
    20. Fabiana Gómez & Jorge Ponce, 2010. "Loan market competition screening and bank stability," Documentos de trabajo 2010005, Banco Central del Uruguay.

    More about this item

    Keywords

    Bank competition; Wholesale funding; Bank risk; Deposit rates;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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