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Bank Competition, Risk, and Asset Allocations

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  • John H. Boyd
  • Gianni De Nicolo
  • Abu M. Jalal

Abstract

We study a banking model in which banks invest in a riskless asset and compete in both deposit and risky loan markets. The model predicts that as competition increases, both loans and assets increase; however, the effect on the loans-to-assets ratio is ambiguous. Similarly, as competition increases, the probability of bank failure can either increase or decrease. We explore these predictions empirically using a cross-sectional sample of 2,500 U.S. banks in 2003, and a panel data set of about 2600 banks in 134 non-industrialized countries for the period 1993-2004. With both samples, we find that banks' probability of failure is negatively and significantly related to measures of competition, and that the loan-to-asset ratio is positively and significantly related to measures of competition. Furthermore, several loan loss measures commonly employed in the literature are negatively and significantly related to measures of bank competition. Thus, there is no evidence of a trade-off between bank competition and stability, and bank competition seems to foster banks' willingness to lend.

Suggested Citation

  • John H. Boyd & Gianni De Nicolo & Abu M. Jalal, 2009. "Bank Competition, Risk, and Asset Allocations," IMF Working Papers 09/143, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:09/143
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Aoki, Kosuke & Nikolov, Kalin, 2015. "Bubbles, banks and financial stability," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 33-51.
    2. Fisher, Paul & Grout, Paul, 2017. "Competition and prudential regulation," Bank of England working papers 675, Bank of England.
    3. Florian LEON, 2015. "What do we know about the role of bank competition in Africa?," Working Papers 201516, CERDI.
    4. 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.
    5. Abdul Latif Alhassan & Michael Lawer Tetteh & Freeman Owusu Brobbey, 2016. "Market power, efficiency and bank profitability: evidence from Ghana," Economic Change and Restructuring, Springer, vol. 49(1), pages 71-93, February.
    6. Lucchetta, Marcella, 2015. "Does the bank risk concentration freeze the interbank system?," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 149-166.
    7. repec:eee:finsta:v:33:y:2017:i:c:p:273-284 is not listed on IDEAS
    8. Kasman, Saadet & Kasman, Adnan, 2015. "Bank competition, concentration and financial stability in the Turkish banking industry," Economic Systems, Elsevier, vol. 39(3), pages 502-517.
    9. repec:dug:actaec:y:2017:i:2:p:122-138 is not listed on IDEAS
    10. repec:wsi:afexxx:v:10:y:2015:i:01:n:s2010495215500013 is not listed on IDEAS
    11. Yu Sun, 2011. "Recent Developments in European Bank Competition," IMF Working Papers 11/146, International Monetary Fund.

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