How Does Competition Impact Bank Risk-Taking?
35 Pages Posted: 5 Apr 2010 Last revised: 8 Apr 2010
Date Written: March 31, 2010
A common assumption in the academic literature is that franchise value plays a key role in limiting bank risk-taking. As market power is the primary source of franchise value, reduced competition in banking markets has been seen as promoting banking stability. We test this hypothesis using data for the Spanish banking system. We find that standard measures of market concentration do not affect bank risk-taking. However, we find a negative relationship between market power measured using Lerner indexes based on bank-specific interest rates and bank risk. Our results support the franchise value paradigm.
Keywords: bank competition, franchise value, Lerner index, credit risk, financial stability
JEL Classification: G21, L11
Suggested Citation: Suggested Citation