Bank Competition, Risk, and Asset Allocations

By John H. Boyd, Gianni De Nicolo, Abu M. Jalal

July 1, 2009

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John H. Boyd, Gianni De Nicolo, and Abu M. Jalal Bank Competition, Risk, and Asset Allocations, (USA: International Monetary Fund, 2009) accessed December 3, 2024

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.

Subject: Bank credit, Banking, Competition, Distressed institutions, Loans

Keywords: Bank failure, Exchange rate, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/143
Stock No:

WPIEA2009143
ISBN:

9781451872903
ISSN:

1018-5941

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