Bank Competition, Risk and Asset Allocations

36 Pages Posted: 4 Aug 2009

See all articles by Gianni De Nicolo

Gianni De Nicolo

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

John H. Boyd

Florida International University (FIU) - Department of Economics

Abu M. Jalal

affiliation not provided to SSRN

Date Written: July 2009

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.

Keywords: Asset management, Banking, Bankruptcy, Banks, Competition, Credit risk, Cross country analysis, Depositories, Economic models, Financial crisis, Time series, United States

Suggested Citation

De Nicolo, Gianni and Boyd, John H. and Jalal, Abu M., Bank Competition, Risk and Asset Allocations (July 2009). IMF Working Papers, Vol. , pp. 1-35, 2009. Available at SSRN: https://ssrn.com/abstract=1442245

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

John H. Boyd

Florida International University (FIU) - Department of Economics ( email )

Miami, FL 33199
United States

Abu M. Jalal

affiliation not provided to SSRN

No Address Available

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