Bank Ownership, Market Structure and Risk

46 Pages Posted: 28 Nov 2007

See all articles by Gianni De Nicolo

Gianni De Nicolo

Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)

Elena Loukoianova

International Monetary Fund (IMF)

Date Written: September 2007

Abstract

This paper presents a model of a banking industry with heterogeneous banks that delivers predictions on the relationship between banks' risk of failure, market structure, bank ownership, and banks' screening and bankruptcy costs. These predictions are explored empirically using a panel of individual banks data and ownership information including more than 10,000 bank-year observations for 133 non-industrialized countries during the 1993-2004 period. Four main results obtain. First, the positive and significant relationship between bank concentration and bank risk of failure found in Boyd, De Nicolò and Al Jalal (2006) is stronger when bank ownership is taken into account, and it is strongest when state-owned banks have sizeable market shares. Second, conditional on country and firm specific characteristics, the risk profiles of foreign (state-owned) banks are significantly higher than (not significantly different from) those of private domestic banks. Third, private domestic banks do take on more risk as a result of larger market shares of both state-owned and foreign banks. Fourth, the model rationalizes this evidence if both state-owned and foreign banks have either larger screening and/or lower bankruptcy costs than private domestic banks, banks' differences in market shares, screening or bankruptcy costs are not too large, and loan markets are sufficiently segmented across banks of different ownership.

Keywords: Working Paper, Banks, Corporate sector, Financial risk, Bankruptcy, Industrial structure

Suggested Citation

De Nicolo, Gianni and Loukoianova, Elena, Bank Ownership, Market Structure and Risk (September 2007). IMF Working Papers, Vol. , pp. 1-44, 2007. Available at SSRN: https://ssrn.com/abstract=1033208

Gianni De Nicolo (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
(410) 234-4507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Elena Loukoianova

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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