Bank Risk-Taking and Competition Revisited: New Theory and New Evidence

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

December 1, 2006

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Gianni De Nicolo, Abu M. Jalal, and John H. Boyd Bank Risk-Taking and Competition Revisited: New Theory and New Evidence, (USA: International Monetary Fund, 2006) accessed November 9, 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

This paper studies two new models in which banks face a non-trivial asset allocation decision. The first model (CVH) predicts a negative relationship between banks' risk of failure and concentration, indicating a trade-off between competition and stability. The second model (BDN) predicts a positive relationship, suggesting no such trade-off exists. Both models can predict a negative relationship between concentration and bank loan-to-asset ratios, and a nonmonotonic relationship between bank concentration and profitability. We explore these predictions empirically using a cross-sectional sample of about 2,500 U.S. banks in 2003 and a panel data set of about 2,600 banks in 134 nonindustrialized countries for 1993-2004. In both these samples, we find that banks' probability of failure is positively and significantly related to concentration, loan-to-asset ratios are negatively and significantly related to concentration, and bank profits are positively and significantly related to concentration. Thus, the risk predictions of the CVH model are rejected, those of the BDN model are not, there is no trade-off between bank competition and stability, and bank competition fosters the willingness of banks to lend.

Subject: Banking, Bonds, Competition, Econometric analysis, Estimation techniques, Financial institutions, Financial markets, Loans, National accounts, Personal income

Keywords: Asset Allocations, Bank assets, Bank capitalization ratio, Bank Competition, Bank market, Bank profit, Bank risk-taking, Bank size, Bonds, Competition, Concentration, Estimation techniques, Loans, Market definition, Market structure, Monopolist bank, Mover accent, Personal income, Rate of return, Risk, Risk of failure, Western Europe, WP

Publication Details

Pages:

49
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/297
Stock No:

WPIEA2006297
ISBN:

9781451865578
ISSN:

1018-5941

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