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Bank Competition, Risk and Asset Allocations

Author/Editor: Boyd, John H. | De Nicoló, Gianni | Jalal, Abu M.
Authorized for Distribution: July 1, 2009
Electronic Access: Free Full Text (PDF file size is 718KB)
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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: We study a banking model in which banks invest in a riskless asset and compete in both deposit and risky loan markets. The model predicts that as competition increases, both loans and assets increase; however, the effect on the loans-to-assets ratio is ambiguous. Similarly, as competition increases, the probability of bank failure can either increase or decrease. We explore these predictions empirically using a cross-sectional sample of 2,500 U.S. banks in 2003, and a panel data set of about 2600 banks in 134 non-industrialized countries for the period 1993-2004. With both samples, we find that banks' probability of failure is negatively and significantly related to measures of competition, and that the loan-to-asset ratio is positively and significantly related to measures of competition. Furthermore, several loan loss measures commonly employed in the literature are negatively and significantly related to measures of bank competition. Thus, there is no evidence of a trade-off between bank competition and stability, and bank competition seems to foster banks' willingness to lend.
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Series: Working Paper No. 09/143
Subject(s): Asset management | Banking | Bankruptcy | Banks | Competition | Credit risk | Cross country analysis | Depositories | Economic models | Financial crisis | Time series | United States
Author's keyword(s): Bank competition | concentration | risk | asset
    Published:   July 1, 2009        
            Format:   Paper
    Stock No:   WPIEA2009143   Pages:   35
    Price:   US$18.00 (Academic Rate: US$18.00 )
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