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How Does Competition Impact Bank Risk-Taking?

Author

Listed:
  • Gabriel Jiménez

    (Banco de España)

  • Jose A. Lopez

    (Federal Reserve Bank Of San Francisco)

  • Jesús Saurina

    (Banco de España)

Abstract

A common assumption in the academic literature is that franchise value plays a key role in limiting bank risk-taking. As market power is the primary source of franchise value, reduced competition in banking markets has been seen as promoting banking stability. We test this hypothesis using data for the Spanish banking system. We find that standard measures of market concentration do not affect bank risk-taking. However, we find a negative relationship between market power measured using Lerner indexes based on bank-specific interest rates and bank risk. Our results support the franchise value paradigm.

Suggested Citation

  • Gabriel Jiménez & Jose A. Lopez & Jesús Saurina, 2010. "How Does Competition Impact Bank Risk-Taking?," Working Papers 1005, Banco de España.
    • Handle: RePEc:bde:wpaper:1005
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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/10/Fic/dt1005e.pdf
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    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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