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The Relationship Between Banking Market Competition and Risk-taking: Do Size and Capitalization Matter?

  • Benjamin M. Tabak
  • Dimas M. Fazio
  • Daniel O. Cajueiro

This paper aims to study the effect of banking competition on Latin American banks' risk-taking and whether capitalization and size changes this relationship. We conclude that: (1) competition affects risk in a non-linear manner: high/low (average) competition are related to more (less) stability; (2) bank's size explains the advantage from competition, while capitalization is only positive for larger banks in this case; (3) capital ratio explains the advantage from lower competition. These results are of uttermost importance for bank regulation, especially due to the recent turmoil in worldwide financial markets.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps261.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 261.

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Date of creation: Nov 2011
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Handle: RePEc:bcb:wpaper:261
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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