Bank Market Power Rents and Risk: Theory and Measurement

32 Pages Posted: 14 Jul 2010 Last revised: 20 Nov 2010

See all articles by Gianni De Nicolo

Gianni De Nicolo

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

Rima Turk-Ariss

International Monetary Fund; Economic Research Forum

Date Written: 2010

Abstract

This paper presents new measures of market power rents in loan and deposit markets and examines their impact on bank risk-taking. These new measures are derived from optimality conditions common to a wide variety of theoretical models of banks operating under uncertainty and choosing their risk profile. We estimate loan and deposit market power rents using two large European panel datasets of bank consolidated and unconsolidated accounts.

Three main results obtain. First, bank loan and deposit rents are significant and highly positively correlated both at a consolidated and unconsolidated level. Second, larger bank loan and deposit rents predict higher probabilities of bank failures and lower bank capitalization. Third, the quest for market power rents is an important driver for bank consolidation.

These results are consistent with the absence of a trade-off between competition and stability, as well as with market power rents being an important driver of bank consolidation and increased systemic risk.

Suggested Citation

De Nicolo, Gianni and Turk-Ariss, Rima, Bank Market Power Rents and Risk: Theory and Measurement (2010). Paolo Baffi Centre Research Paper No. 2010-73. Available at SSRN: https://ssrn.com/abstract=1639387 or http://dx.doi.org/10.2139/ssrn.1639387

Gianni De Nicolo

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

Rima Turk-Ariss (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Economic Research Forum ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo
Egypt

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