## Bank Competition, Risk, and Asset Allocations

_IMF Working Papers, July 1, 2009_

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## Bibliographic details
- Authors: John H. Boyd, Gianni De Nicolo, Abu M. Jalal
- Published: July 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451872903.001

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### Model predictions
- Banks invest in a riskless asset and compete in both deposit and risky loan markets.
- As competition increases:
  - Both loans and assets increase.
  - The effect on the loans-to-assets ratio is ambiguous.
  - The probability of bank failure can either increase or decrease.

### Empirical approach and samples
- Cross-sectional sample:
  - 2,500 U.S. banks in 2003.
- Panel data set:
  - About 2,600 banks in 134 non-industrialized countries for the period 1993-2004.
- Empirical measures include:
  - Measures of competition.
  - Loan-to-asset ratios.
  - Several loan loss measures commonly employed in the literature.
  - Banks' probability of failure.

### Key empirical findings
- Relationship between competition and probability of failure:
  - Banks' probability of failure is negatively and significantly related to measures of competition (found in both samples).
- Relationship between competition and lending behavior:
  - The loan-to-asset ratio is positively and significantly related to measures of competition (found in both samples).
- Relationship between competition and asset quality:
  - Several loan loss measures are negatively and significantly related to measures of bank competition.
- Overall interpretation:
  - There is no evidence of a trade-off between bank competition and stability.
  - Bank competition seems to foster banks' willingness to lend.

### Implications and conclusions
- Increased competition is associated with higher lending (loans and loan-to-asset ratios) without evidence of higher failure risk in the samples analyzed.
- Loan loss measures declining with competition suggest improvements in asset performance or selection under greater competition.
- The ambiguous theoretical link between competition and the loans-to-assets ratio, and between competition and failure probability, is resolved empirically in these samples toward pro-competition outcomes for lending and stability.

*John H. Boyd, Gianni De Nicolo, and Abu M. Jalal "Bank Competition, Risk, and Asset Allocations", IMF Working Papers 2009, 143 (2009), accessed 9/17/2026, https://doi.org/10.5089/9781451872903.001*

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