Bank Competition, Risk and Asset Allocations
36 Pages Posted: 4 Aug 2009
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Bank Risk Taking and Competition Revisited
By John H. Boyd and Gianni De Nicolo
-
Liberalization, Moral Hazard in Banking and Prudential Regulation: Are Capital Requirements Enough?
-
Competition and Financial Stability
By Franklin Allen and Douglas M. Gale
-
Capital Requirements, Market Power and Risk-Taking in Banking
-
Size, Charter Value and Risk in Banking: An International Perspective
-
Competition and Stability: What's Special About Banking?
By Elena Carletti and Philipp Hartmann
-
Bank Risk-Taking and Competition Revisited: New Theory and New Evidence
By John H. Boyd, Gianni De Nicolo, ...
-
By Thorsten Beck, Asli Demirgüç-kunt, ...
-
By Thorsten Beck, Asli Demirgüç-kunt, ...