Bank Risk-Taking and Competition Revisited: New Theory and New Evidence

51 Pages Posted: 12 Jan 2007

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 M. Jalal

University of Minnesota - Twin Cities - Department of Business Finance

Date Written: Janurary 2007

Abstract

This paper studies two new models in which banks face a non-trivial asset allocation decision. The first model (CVH) predicts a negative relationship between banks' risk of failure and concentration, indicating a trade-off between competition and stability. The second model (BDN) predicts a positive relationship, suggesting no such trade-off exists. Both models can predict a negative relationship between concentration and bank loan-to-asset ratios, and a nonmonotonic relationship between bank concentration and profitability. We explore these predictions empirically using a cross-sectional sample of about 2,500 U.S. banks in 2003 and a panel data set of about 2,600 banks in 134 nonindustrialized countries for 1993-2004. In both these samples, we find that banks' probability of failure is positively and significantly related to concentration, loan-to-asset ratios are negatively and significantly related to concentration, and bank profits are positively and significantly related to concentration. Thus, the risk predictions of the CVH model are rejected, those of the BDN model are not, there is no trade-off between bank competition and stability, and bank competition fosters the willingness of banks to lend.

Keywords: Bank soundness, Competition, Profits, Asset management, Resource allocation, Risk management, Economic models

JEL Classification: G21, G23, L13

Suggested Citation

Boyd, John H. and De Nicolo, Gianni and Jalal, Abu M., Bank Risk-Taking and Competition Revisited: New Theory and New Evidence (Janurary 2007). IMF Working Paper No. 06/297. Available at SSRN: https://ssrn.com/abstract=956761

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 M. Jalal

University of Minnesota - Twin Cities - Department of Business Finance ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,193
rank
16,120
Abstract Views
4,354
PlumX Metrics