How Does Competition Impact Bank Risk-Taking?

35 Pages Posted: 5 Apr 2010 Last revised: 8 Apr 2010

See all articles by Gabriel Jiménez

Gabriel Jiménez

Banco de España

Jose A. Lopez

Federal Reserve Bank of San Francisco

Jesus Saurina Salas

Banco de España

Date Written: March 31, 2010

Abstract

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

Jimenez, Gabriel and Lopez, Jose Antonio and Saurina Salas, Jesus, How Does Competition Impact Bank Risk-Taking? (March 31, 2010). Banco de Espana Working Paper No. 1005. Available at SSRN: https://ssrn.com/abstract=1582331 or http://dx.doi.org/10.2139/ssrn.1582331

Gabriel Jimenez (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Jose Antonio Lopez

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-977-3894 (Phone)
415-974-2168 (Fax)

Jesus Saurina Salas

Banco de España ( email )

Madrid 28014
Spain

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