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Bank Risk-Taking and Competition Revisited

Author/Editor: Boyd, John H. | De Nicoló, Gianni
Authorized for Distribution: June 1, 2003
Electronic Access: Free Full Text (PDF file size is 659KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: This study reinvestigates the theoretical relationship between competition in banking and banks' exposure to risk of failure. There is a large existing literature that concludes that when banks are confronted with increased competition, they rationally choose more risky portfolios. We briefly review this literature and argue that it has had a significant influence on regulators and central bankers, causing them to take a less favorable view of competition and encouraging anti-competitive consolidation as a response to banking instability. We then show that existing theoretical analyses of this topic are fragile, since they do not detect two fundamental risk-incentive mechanisms that operate in exactly the opposite direction, causing banks to aquire more risk per portfolios as their markets become more concentrated. We argue that these mechanisms should be essential ingredients of models of bank competition.
 
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Series: Working Paper No. 03/114
Subject(s): Banking | Competition | Economic models
Author's keyword(s): Bank risk-shifting | competition
 
English  
    Published:   June 1, 2003        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA1142003   Pages:   23
    Price:   US$15.00 (Academic Rate: US$15.00 )
       
     
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