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Loan Market Competition and Bank Risk-Taking

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  • Wolf Wagner

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Abstract

Recent literature (Boyd and De Nicoló, 2005) has argued that competition in the loan market lowers bank risk by reducing the risk-taking incentives of borrowers. We show that the impact of loan market competition on banks is reversed if banks can adjust their loan portfolios. The reason is that when borrowers become safer, banks want to offset the effect on their balance sheet and switch to higher-risk lending. They even overcompensate the effect of safer borrowers because loan market competition erodes their franchise values and thus increases their risk-taking incentives.
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Suggested Citation

  • Wolf Wagner, 2010. "Loan Market Competition and Bank Risk-Taking," Journal of Financial Services Research, Springer;Western Finance Association, vol. 37(1), pages 71-81, February.
  • Handle: RePEc:kap:jfsres:v:37:y:2010:i:1:p:71-81 DOI: 10.1007/s10693-009-0073-8
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    References listed on IDEAS

    as
    1. Repullo, Rafael, 2004. "Capital requirements, market power, and risk-taking in banking," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 156-182, April.
    2. Gianni De Nicolo & Abu M. Jalal & John H. Boyd, 2006. "Bank Risk-Taking and Competition Revisited; New Theory and New Evidence," IMF Working Papers 06/297, International Monetary Fund.
    3. Thakor, Anjan V., 2000. "Relationship Banking," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 3-5, January.
    4. Giovanni Dell'Ariccia & Robert Marquez, 2006. "Lending Booms and Lending Standards," Journal of Finance, American Finance Association, vol. 61(5), pages 2511-2546, October.
    5. Robert Hauswald & Robert Marquez, 2006. "Competition and Strategic Information Acquisition in Credit Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 967-1000.
    6. John H. Boyd & Gianni De Nicolã, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, June.
    7. Dell'Ariccia, Giovanni & Marquez, Robert, 2004. "Information and bank credit allocation," Journal of Financial Economics, Elsevier, vol. 72(1), pages 185-214, April.
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    Citations

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    Cited by:

    1. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2014. "How does competition affect bank systemic risk?," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 1-26.
    2. repec:eee:jbfina:v:80:y:2017:i:c:p:108-118 is not listed on IDEAS
    3. Tabak, Benjamin M. & Fazio, Dimas M. & Cajueiro, Daniel O., 2012. "The relationship between banking market competition and risk-taking: Do size and capitalization matter?," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3366-3381.
    4. Eva Schliephake & Roland Kirstein, 2013. "Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 675-700, June.
    5. Sarmiento Paipilla, N.M. & Galán, Jorge E., 2015. "The Influence of Risk-taking on Bank Efficiency : Evidence from Colombia," Discussion Paper 2015-036, Tilburg University, Center for Economic Research.
    6. Beck, T.H.L. & De Jonghe, O.G. & Schepens, G., 2012. "Bank Competition and Stability : Cross-country Heterogeneity (Revised version of CentER DP 2011-080)," Discussion Paper 2012-085, Tilburg University, Center for Economic Research.
    7. Francesco Marchionne & Alberto Zazzaro, 2013. "Rischio e concorrenza nel sistema bancario italiano durante la crisi finanziaria globale," Mo.Fi.R. Working Papers 86, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    8. Khemais Zaghdoudi & Abdelaziz Hakimi, 2017. "The Determinants of Liquidity Risk: Evidence from Tunisian Banks," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 7(2), pages 1-5.
    9. Tabak, Benjamin M. & Gomes, Guilherme M.R. & da Silva Medeiros, Maurício, 2015. "The impact of market power at bank level in risk-taking: The Brazilian case," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 154-165.
    10. Beck, Thorsten & De Jonghe, Olivier & Schepens, Glenn, 2013. "Bank competition and stability: Cross-country heterogeneity," Journal of Financial Intermediation, Elsevier, pages 218-244.
    11. Iftekhar Hasan & Matej Marinč, 2016. "Should competition policy in banking be amended during crises? Lessons from the EU," European Journal of Law and Economics, Springer, vol. 42(2), pages 295-324, October.
    12. Barra, Cristian & Zotti, Roberto, 2017. "On the relationship between bank market concentration and stability of financial institutions: Evidence from the Italian banking sector," MPRA Paper 79900, University Library of Munich, Germany.
    13. Stefan Arping, 2012. "Banking Competition and Soft Budget Constraints: How Market Power can threaten Discipline in Lending," Tinbergen Institute Discussion Papers 12-146/IV/DSF49, Tinbergen Institute.
    14. Shijaku, Gerti, 2017. "Bank Stability and Competition: Evidence from Albanian Banking Market," MPRA Paper 79891, University Library of Munich, Germany.
    15. Kick, Thomas & Prieto, Esteban, 2013. "Bank risk taking and competition: Evidence from regional banking markets," Discussion Papers 30/2013, Deutsche Bundesbank.
    16. Franco Fiordelisi & Stefano Monferrà & Gabriele Sampagnaro, 2014. "Relationship Lending and Credit Quality," Journal of Financial Services Research, Springer;Western Finance Association, vol. 46(3), pages 295-315, December.
    17. repec:eee:quaeco:v:65:y:2017:i:c:p:114-127 is not listed on IDEAS
    18. repec:rsr:supplm:v:65:y:2017:i:5:p:17-30 is not listed on IDEAS
    19. Shijaku, Gerti, 2016. "Does bank competition affect bank stability after the global financial crisis?," MPRA Paper 79084, University Library of Munich, Germany.
    20. Ronald Fischer & Nicolás Inostroza & Felipe J. Ramírez, 2015. "Banking Competition and Economic Stability," Documentos de Trabajo 320, Centro de Economía Aplicada, Universidad de Chile.
    21. Alina Mihaela Dima & Simona Vasilache, 2016. "Credit Risk modeling for Companies Default Prediction using Neural Networks," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 127-143, September.
    22. Melnik, Arie & Shy, Oz, 2015. "Exclusion, competition, and regulation in the retail loan market," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 189-198.
    23. repec:eee:ememar:v:32:y:2017:i:c:p:52-73 is not listed on IDEAS
    24. Stefan Arping, 2014. "Does Competition make Banks more Risk-seeking?," Tinbergen Institute Discussion Papers 14-059/IV, Tinbergen Institute.
    25. BARRA, Cristian & ZOTTI, Roberto, 2017. "Bank Performance, Financial Stability and Market Competition: do Cooperative and Non-Cooperative Banks Behave Differently?," CELPE Discussion Papers 143, CELPE - Centre of Labour Economics and Economic Policy, University of Salerno, Italy.

    More about this item

    Keywords

    Loan market competition; Risk shifting; Bank stability; G21; L11;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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