How does competition impact bank risk-taking?
A common assumption in the academic literature and in the actual supervision of banking systems worldwide is that franchise value plays a key role in limiting bank risk-taking. As the underlying source of franchise value is assumed to be market power, reduced competition has been considered to promote banking stability. Boyd and De Nicolo (2005) propose an alternative view where concentration in the loan market could lead to increased borrower debt loads and a corresponding increase in loan defaults that undermine bank stability. Martinez-Miera and Repullo (2007) encompass both approaches by proposing a nonlinear relationship between competition and bank risk-taking. Using unique datasets for the Spanish banking system, we examine the empirical nature of that relationship. After controlling for macroeconomic conditions and bank characteristics, we find that standard measures of market concentration do not affect the ratio of non-performing commercial loans (NPL), our measure of bank risk. However, using Lerner indexes based on bank-specific interest rates, we find a negative relationship between loan market power and bank risk. This result provides evidence in favor of the franchise value paradigm.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (415) 974-2000
Fax: (415) 974-3333
Web page: http://www.frbsf.org/Email:
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Allen, Franklin & Gale, Douglas, 2004.
"Competition and Financial Stability,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 36(3), pages 453-80, June.
- Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2003.
"Bank Concentration and Crises,"
NBER Working Papers
9921, National Bureau of Economic Research, Inc.
- Claessens, Stijn & Laeven, Luc, 2003.
"What drives bank competition? some international evidence,"
Policy Research Working Paper Series
3113, The World Bank.
- Stijn Claessens & Luc Laeven, 2004. "What drives bank competition? Some international evidence," Proceedings, Federal Reserve Bank of Cleveland, pages 563-592.
- Claessens, Stijn & Laeven, Luc, 2004. "What Drives Bank Competition? Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 563-83, June.
- Alfredo Martín-Oliver & Vicente Salas-Fumás & Jesús Saurina, 2005.
"A test of the law of one price in retail banking,"
Banco de Espa�a Working Papers
0530, Banco de Espa�a.
- Jimenez, Gabriel & Salas, Vicente & Saurina, Jesus, 2006. "Determinants of collateral," Journal of Financial Economics, Elsevier, vol. 81(2), pages 255-281, August.
- Rafael Repullo & David Martínez-Miera, 2008.
"Does Competition Reduce The Risk Of Bank Failure?,"
- Eduardo Levy Yeyati & Alejandro Micco, 2003.
"Concentration and Foreign Penetration in Latin American Banking Sectors: Impact on Competition and Risk,"
IDB Publications (Working Papers)
6514, Inter-American Development Bank.
- 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.
- Eduardo Levy Yeyati & Alejandro Micco, 2003. "Concentration and Foreign Penetration in Latin American Banking Sectors: Impact on Competition and Risk," Business School Working Papers cinco, Universidad Torcuato Di Tella.
- Eduardo Levy Yeyati & Alejandro Micco, 2003. "Concentration and Foreign Penetration in Latin American Banking Sectors: Impact on Competition and Risk," Research Department Publications 4353, Inter-American Development Bank, Research Department.
- Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004.
"Information Reusability, Competition and Bank Asset Quality,"
- Chan, Yuk-Shee & Greenbaum, Stuart I. & Thakor, Anjan V., 1986. "Information reusability, competition and bank asset quality," Journal of Banking & Finance, Elsevier, vol. 10(2), pages 243-253, June.
- Matutes, Carmen & Vives, Xavier, 2000.
"Imperfect competition, risk taking, and regulation in banking,"
European Economic Review,
Elsevier, vol. 44(1), pages 1-34, January.
- Matutes, Carmen & Vives, Xavier, 1995. "Imperfect Competition, Risk Taking, and Regulation in Banking," CEPR Discussion Papers 1177, C.E.P.R. Discussion Papers.
- Gianni De NicolÃ³ & 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.
- David Besanko & Anjan V. Thakor, 2004. "Relationship Banking, Deposit Insurance and Bank Portfolio Choice," Finance 0411046, EconWPA.
- Berger, Allen N, et al, 2004. "Bank Concentration and Competition: An Evolution in the Making," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 433-51, June.
- 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.
- Philipp Hartmann & Elena Carletti, 2002.
"Competition and Stability: What's Special about Banking?,"
FMG Special Papers
sp140, Financial Markets Group.
- Carletti, Elena & Hartmann, Philipp, 2002. "Competition and stability: what's special about banking?," Working Paper Series 0146, European Central Bank.
- Robert Marquez, 2002. "Competition, Adverse Selection, and Information Dispersion in the Banking Industry," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 901-926.
- 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.
- 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.
- Marcello Bofondi & Giorgio Gobbi, 2004. "Bad Loans and Entry into Local Credit Markets," Temi di discussione (Economic working papers) 509, Bank of Italy, Economic Research and International Relations Area.
When requesting a correction, please mention this item's handle: RePEc:fip:fedfwp:2007-23. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger)
If references are entirely missing, you can add them using this form.