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How Does Competition Impact Bank Risk-Taking?

  • Gabriel Jiménez

    ()

    (Banco de España)

  • Jose A. Lopez

    ()

    (Federal Reserve Bank Of San Francisco)

  • Jesús Saurina

    ()

    (Banco de España)

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.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/10/Fic/dt1005e.pdf
File Function: First version, March 2010
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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1005.

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Length: 38 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:bde:wpaper:1005
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  1. Yeyati, Eduardo Levy & Micco, Alejandro, 2007. "Concentration and foreign penetration in Latin American banking sectors: Impact on competition and risk," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1633-1647, June.
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  10. Oliver, Alfredo Martin & Fumas, Vicente Salas & Saurina, Jesus, 2006. "Risk premium and market power in credit markets," Economics Letters, Elsevier, vol. 93(3), pages 450-456, December.
  11. Carletti, Elena & Hartmann, Philipp, 2002. "Competition and stability: what's special about banking?," Working Paper Series 0146, European Central Bank.
  12. Jimenez, Gabriel & Salas, Vicente & Saurina, Jesus, 2006. "Determinants of collateral," Journal of Financial Economics, Elsevier, vol. 81(2), pages 255-281, August.
  13. Vicente Salas & Jesús Saurina, 2002. "Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks," Journal of Financial Services Research, Springer, vol. 22(3), pages 203-224, December.
  14. Alfredo Martín-Oliver & Vicente Salas-Fumás & Jesus Saurina, 2007. "A Test of the Law of One Price in Retail Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 2021-2040, December.
  15. Gianni De Nicoló & 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.
  16. Franklin Allen & Douglas Gale, 2004. "Competition and financial stability," Proceedings, Federal Reserve Bank of Cleveland, pages 453-486.
  17. 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, 06.
  18. David Besanko & Anjan V. Thakor, 2004. "Relationship Banking, Deposit Insurance and Bank Portfolio Choice," Finance 0411046, EconWPA.
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