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International Financial Competition and Bank Risk-Taking in Emerging Economies

17 Pages Posted: 11 Dec 2009  

Skerdilajda Zanaj

Catholic University of Louvain - Center for Operations Research and Econometrics (CORE)

Arnaud Bourgain

Centre de Recherche en Économie Appliquée (CREA)

Patrice Pieretti Sr.

Universite du Luxembourg; Centre de Recherche en Économie Appliquée (CREA)

Date Written: December 2009

Abstract

In this paper, we analyze the risk taking behavior of banks in emerging economies, in a context of international bank competition. In the spirit of Vives (2002 and 2006) who has developed the notion of "external market discipline", our paper introduces a new channel through which depositors can exercise pressure to control risk taking. They can reallocate their savings away from their home country to a more protective system of a developed economy. In such a frame-work, we show that there is no univoque relationship between the information disclosure of risk management and excessive risk taking. This relationship depends on the degree of financial openness of the emergent country, which ultimately defines how effective the market discipline is. Furthermore, we analyze the risk taking choice of banks in emergent economies in presence of deposit insurance. We find no monotone relationship between the likeliness of excessive risk taking of banks in the emerging country and the level of deposit insurance.

Keywords: banking competition, transparency, deposit insurance, market discipline

JEL Classification: G21, G28, F39, L60

Suggested Citation

Zanaj, Skerdilajda and Bourgain, Arnaud and Pieretti, Patrice, International Financial Competition and Bank Risk-Taking in Emerging Economies (December 2009). Paolo Baffi Centre Research Paper No. 2009-63. Available at SSRN: https://ssrn.com/abstract=1520928 or http://dx.doi.org/10.2139/ssrn.1520928

Skerdilajda Zanaj (Contact Author)

Catholic University of Louvain - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Arnaud Bourgain

Centre de Recherche en Économie Appliquée (CREA) ( email )

Campus Limpertsberg
162A, avenue de la Faïencerie
Luxembourg, 1511
Luxembourg

Patrice Pieretti Sr.

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

Centre de Recherche en Économie Appliquée (CREA) ( email )

Campus Limpertsberg
162A, avenue de la Faïencerie
Luxembourg, 1511
Luxembourg

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