Loan Market Competition and Bank Risk-Taking

Wagner, Wolf

doi:10.2139/ssrn.976019

Loan Market Competition and Bank Risk-Taking

TILEC Discussion Paper No. 2007-010

11 Pages Posted: 31 Mar 2007

See all articles by Wolf Wagner

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Date Written: March 2007

Abstract

Recent literature (Boyd and De Nicoló, 2005) has argued that competition in the loan market lowers bank risk by reducing the risk-taking incentives of borrowers. We show that the impact of loan market competition on banks is reversed if banks can adjust their loan portfolios. The reason is that when borrowers become safer, banks want to offset the effect on their balance sheet and switch to higher-risk lending. They even overcompensate the effect of safer borrowers because loan market competition erodes their franchise values and thus increases their risk-taking incentives.

Keywords: loan market competition, risk shifting, bank stability

JEL Classification: G21, L11

Suggested Citation: Suggested Citation

Wagner, Wolf, Loan Market Competition and Bank Risk-Taking (March 2007). TILEC Discussion Paper No. 2007-010. Available at SSRN: https://ssrn.com/abstract=976019 or http://dx.doi.org/10.2139/ssrn.976019