Bank Competition, Asset Allocations and Risk of Failure: An Empirical Investigation

39 Pages Posted: 8 Oct 2010

See all articles by John H. Boyd

John H. Boyd

University of Minnesota - Twin Cities - Carlson School of Management

Gianni De Nicolo

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

Abu Jalal

Suffolk University - Sawyer School of Management

Date Written: September 29, 2010

Abstract

This study is an empirical investigation of theoretical predictions concerning the impact of bank competition on bank risk and asset allocations. Recent work (Boyd, De Nicolò and Jalal, 2009, BDNJ henceforth) predicts that as competition in banking increases, the loan-to-asset ratio will rise (under reasonable assumptions), but the probability of bank failure can either increase or decrease. However, the probability of bank failure will fall if and only if borrowers’ response to take on less risk as loan rates decline is sufficiently strong. We test these predictions using two samples with radically different attributes. With both, we find that banks’ probability of failure is negatively and significantly related to measures of competition. We also find that as competition intensifies, borrower risk decreases and the loan-to-asset ratio increases. These results are consistent with the predictions of the BDNJ model.

Suggested Citation

Boyd, John H. and De Nicolo, Gianni and Jalal, Abu, Bank Competition, Asset Allocations and Risk of Failure: An Empirical Investigation (September 29, 2010). CESifo Working Paper Series No. 3198. Available at SSRN: https://ssrn.com/abstract=1688269

John H. Boyd

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1834 (Phone)

Gianni De Nicolo (Contact Author)

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

Abu Jalal

Suffolk University - Sawyer School of Management ( email )

Boston, MA 02108
United States

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