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| Author | : Mr.Gianni De Nicolo |
| Publisher | : International Monetary Fund |
| Total Pages | : 25 |
| Release | : 2003-06-01 |
| Genre | : Business & Economics |
| ISBN | : 1451853815 |
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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.
| Author | : Mr.Gianni De Nicolo |
| Publisher | : International Monetary Fund |
| Total Pages | : 51 |
| Release | : 2006-12-01 |
| Genre | : Business & Economics |
| ISBN | : 1451865570 |
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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.
| Author | : Alan Xiaochen Feng |
| Publisher | : International Monetary Fund |
| Total Pages | : 46 |
| Release | : 2018-07-06 |
| Genre | : Business & Economics |
| ISBN | : 1484368037 |
Download Bank Competition, Risk Taking, and their Consequences: Evidence from the U.S. Mortgage and Labor Markets Book in PDF, ePub and Kindle
Bank competition can induce excessive risk taking due to risk shifting. This paper tests this hypothesis using micro-level U.S. mortgage data by exploiting the exogenous variation in local house price volatility. The paper finds that, in response to high expected house price volatility, banks in U.S. counties with a competitive mortgage market lowered lending standards by twice as much as those with concentrated markets between 2000 and 2005. Such risk taking pattern was associated with real economic outcomes during the financial crisis, including higher unemployment rates in local real sectors.
| Author | : Thomas K. Kick |
| Publisher | : |
| Total Pages | : 31 |
| Release | : 2016 |
| Genre | : |
| ISBN | : |
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This study investigates the bank competition-stability nexus using a unique regulatory dataset provided by the Deutsche Bundesbank over the period 1994 to 2010. First, we use outright bank defaults as the most direct measure of bank risk available and contrast the results to weaker forms of bank distress. Second, we control for a wide array of different time-varying characteristics of banks which are likely to influence the competition-risk taking channel. Third, we include different measures of competition, contestability and market power, each corresponding to a different contextual level of a bank's competitive environment. Our results indicate that political implications derived from empirical banking market studies must recognize the theoretical properties of the indicators for market power and competition. Using the Lerner Index as a proxy for bank-specific market power, our results support the view that market power tends to reduce banks' default probability. In contrast, using the Boone Indicator (derived on the state level) and/or the regional branch share as a measure of competition, we find strong support that increased competition lowers the riskiness of banks.
| Author | : Gianni De Nicoló |
| Publisher | : International Monetary Fund |
| Total Pages | : 42 |
| Release | : 2009-07 |
| Genre | : Business & Economics |
| ISBN | : |
Download Bank Competition, Risk and Asset Allocations Book in PDF, ePub and Kindle
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.
| Author | : Mr.Tito Cordella |
| Publisher | : International Monetary Fund |
| Total Pages | : 46 |
| Release | : 1998-06-01 |
| Genre | : Business & Economics |
| ISBN | : 1451851995 |
Download Financial Opening, Deposit Insurance, and Risk in a Model of Banking Competition Book in PDF, ePub and Kindle
This paper studies the impact of competition on the determination of interest rates and banks’ risk-taking behavior under different assumptions about deposit insurance and the dissemination of financial information. It finds that lower entry costs foster competition in deposit rate sand reduce banks’ incentives to limit risk exposure. Although higher insurance coverage amplifies this effect, two alternative arrangements (risk-based contributions to the insurance fund and public disclosure of financial information) help to reduce it. Moreover, uninsured but fully informed depositors and risk-based full deposit insurance yield the same equilibrium risk level, which is independent of entry costs. The welfare implications of the different arrangements are also explored.
| Author | : Mr.Gianni De Nicolo |
| Publisher | : International Monetary Fund |
| Total Pages | : 39 |
| Release | : 2011-12-01 |
| Genre | : Business & Economics |
| ISBN | : 1463927290 |
Download Bank Competition and Financial Stability Book in PDF, ePub and Kindle
We study versions of a general equilibrium banking model with moral hazard under either constant or increasing returns to scale of the intermediation technology used by banks to screen and/or monitor borrowers. If the intermediation technology exhibits increasing returns to scale, or it is relatively efficient, then perfect competition is optimal and supports the lowest feasible level of bank risk. Conversely, if the intermediation technology exhibits constant returns to scale, or is relatively inefficient, then imperfect competition and intermediate levels of bank risks are optimal. These results are empirically relevant and carry significant implications for financial policy.
| Author | : Mr.Giovanni Dell'Ariccia |
| Publisher | : International Monetary Fund |
| Total Pages | : 41 |
| Release | : 2013-06-06 |
| Genre | : Business & Economics |
| ISBN | : 1484381130 |
Download Bank Leverage and Monetary Policy's Risk-Taking Channel Book in PDF, ePub and Kindle
We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (as measured by the risk rating of the bank’s loan portfolio) is negatively associated with increases in short-term policy interest rates. This relationship is less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally.
| Author | : Thomas Kick |
| Publisher | : |
| Total Pages | : 25 |
| Release | : 2013 |
| Genre | : |
| ISBN | : 9783865589453 |
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| Author | : Natalya Martynova |
| Publisher | : International Monetary Fund |
| Total Pages | : 44 |
| Release | : 2015-11-25 |
| Genre | : Business & Economics |
| ISBN | : 1513517589 |
Download Bank Profitability and Risk-Taking Book in PDF, ePub and Kindle
Traditional theory suggests that more profitable banks should have lower risk-taking incentives. Then why did many profitable banks choose to invest in untested financial instruments before the crisis, realizing significant losses? We attempt to reconcile theory and evidence. In our setup, banks are endowed with a fixed core business. They take risk by levering up to engage in risky ‘side activities’(such as market-based investments) alongside the core business. A more profitable core business allows a bank to borrow more and take side risks on a larger scale, offsetting lower incentives to take risk of given size. Consequently, more profitable banks may have higher risk-taking incentives. The framework is consistent with cross-sectional patterns of bank risk-taking in the run up to the recent financial crisis.
