Download or read book How Does Competition Impact Bank Risk Taking written by Jesus Saurina Salas and published by . This book was released on 2007 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: A common assumption in the academic literature and in the actual supervision of banking systems worldwide is that franchise value plays a key role in limiting bank risk-taking. As the underlying source of franchise value is assumed to be market power, reduced competition has been considered to promote banking stability. Boyd and De Nicolo (2005) propose an alternative view where concentration in the loan market could lead to increased borrower debt loads and a corresponding increase in loan defaults that undermine bank stability. Martinez-Miera and Repullo (2007) encompass both approaches by proposing a nonlinear relationship between competition and bank risk-taking. Using unique datasets for the Spanish banking system, we examine the empirical nature of that relationship. After controlling for macroeconomic conditions and bank characteristics, we find that standard measures of market concentration do not affect the ratio of non-performing commercial loans (NPL), our measure of bank risk. However, using Lerner indexes based on bank-specific interest rates, we find a negative relationship between loan market power and bank risk. This result provides evidence in favor of the franchise value paradigm.

Download or read book How Does Competition Impact Bank Risk taking written by Gabriel Jiménez and published by . This book was released on 2010 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Bank Risk Taking and Competition Revisited written by Mr.Gianni De Nicolo and published by International Monetary Fund. This book was released on 2006-12-01 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Bank Competition Risk Taking and their Consequences Evidence from the U S Mortgage and Labor Markets written by Alan Xiaochen Feng and published by International Monetary Fund. This book was released on 2018-07-06 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Bank Risk Taking and Competition Revisited written by Mr.Gianni De Nicolo and published by International Monetary Fund. This book was released on 2003-06-01 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Capital Markets and Financial Intermediation written by Colin Mayer and published by Cambridge University Press. This book was released on 1995-09-29 with total page 384 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial intermediation is currently a subject of active research on both sides of the Atlantic. The integration of European financial markets, in particular, highlights several important issues. In this volume, derived from a joint CEPR conference with the Fundacion Banco Bilbao Vizcaya (BBV), leading academics from Europe and North America review 'state-of-the-art' theories of banking and financial intermediation and discuss their policy implications. The principal focus is on the risks of increased competition, the appropriate regulation of banks, and the differences between Anglo-American and Continental European forms of financial markets. Relationship banking, stock markets and banks, banking and corporate control, financial intermediation in Eastern Europe, monetary policy and the banking system, and financial intermediation and growth are also discussed.

Download or read book Bank Leverage and Monetary Policy s Risk Taking Channel written by Mr.Giovanni Dell'Ariccia and published by International Monetary Fund. This book was released on 2013-06-06 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Bank Competition and Financial Stability written by Mr.Gianni De Nicolo and published by International Monetary Fund. This book was released on 2011-12-01 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Bank Risk Taking and Competition written by Thomas K. Kick and published by . This book was released on 2016 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Bank Profitability and Risk Taking written by Natalya Martynova and published by International Monetary Fund. This book was released on 2015-11-25 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Bank Competition Risk and Asset Allocations written by Gianni De Nicoló and published by International Monetary Fund. This book was released on 2009-07 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Determinants of Commercial Bank Interest Margins and Profitability written by Asl? Demirgüç-Kunt and published by World Bank Publications. This book was released on 1998 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: March 1998 Differences in interest margins reflect differences in bank characteristics, macroeconomic conditions, existing financial structure and taxation, regulation, and other institutional factors. Using bank data for 80 countries for 1988-95, Demirgüç-Kunt and Huizinga show that differences in interest margins and bank profitability reflect various determinants: * Bank characteristics. * Macroeconomic conditions. * Explicit and implicit bank taxes. * Regulation of deposit insurance. * General financial structure. * Several underlying legal and institutional indicators. Controlling for differences in bank activity, leverage, and the macroeconomic environment, they find (among other things) that: * Banks in countries with a more competitive banking sector-where banking assets constitute a larger share of GDP-have smaller margins and are less profitable. The bank concentration ratio also affects bank profitability; larger banks tend to have higher margins. * Well-capitalized banks have higher net interest margins and are more profitable. This is consistent with the fact that banks with higher capital ratios have a lower cost of funding because of lower prospective bankruptcy costs. * Differences in a bank's activity mix affect spread and profitability. Banks with relatively high noninterest-earning assets are less profitable. Also, banks that rely largely on deposits for their funding are less profitable, as deposits require more branching and other expenses. Similarly, variations in overhead and other operating costs are reflected in variations in bank interest margins, as banks pass their operating costs (including the corporate tax burden) on to their depositors and lenders. * In developing countries foreign banks have greater margins and profits than domestic banks. In industrial countries, the opposite is true. * Macroeconomic factors also explain variation in interest margins. Inflation is associated with higher realized interest margins and greater profitability. Inflation brings higher costs-more transactions and generally more extensive branch networks-and also more income from bank float. Bank income increases more with inflation than bank costs do. * There is evidence that the corporate tax burden is fully passed on to bank customers in poor and rich countries alike. * Legal and institutional differences matter. Indicators of better contract enforcement, efficiency in the legal system, and lack of corruption are associated with lower realized interest margins and lower profitability. This paper-a product of the Development Research Group-is part of a larger effort in the group to study bank efficiency.

Download or read book How Does Bank Competition Affect Solvency Liquidity and Credit Risk Evidence from the MENA Countries written by Raja Almarzoqi and published by International Monetary Fund. This book was released on 2015-09-29 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper analyzes the relationship between bank competition and stability, with a specific focus on the Middle East and North Africa. Price competition has a positive effect on bank liquidity, as it induces self-discipline incentives on banks for the choice of bank funding sources and for the holding of liquid assets. On the other hand, price competition may have a potentially negative impact on bank solvency and on the credit quality of the loan portfolio. More competitive banks may be less solvent if the potential increase in the equity base—due to capital adjustments—is not large enough to compensate for the reduction in bank profitability. Also, banks subject to stronger competitive pressures may have a higher rate of nonperforming loans, if the increase in the risk-taking incentives from the lender’s side overcomes the decrease in the credit risk from the borrower’s side. In both cases, country-specific policies for market entry conditions—and for bank regulation and supervision—may significantly affect the sign and the size of the relationship. The paper suggests policy reforms designed to improve market contestability and to increase the quality and independence of prudential supervision.

Download or read book The Impact of Competition on Bank Risk taking in Select Sub Saharan Countries written by Teboho Bosiu and published by . This book was released on 2018 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Competition and Stability in Banking written by Xavier Vives and published by Princeton University Press. This book was released on 2020-11-03 with total page 344 pages. Available in PDF, EPUB and Kindle. Book excerpt: A distinguished economist examines competition, regulation, and stability in today's global banks Does too much competition in banking hurt society? What policies can best protect and stabilize banking without stifling it? Institutional responses to such questions have evolved over time, from interventionist regulatory control after the Great Depression to the liberalization policies that started in the United States in the 1970s. The global financial crisis of 2007–2009, which originated from an oversupply of credit, once again raised questions about excessive banking competition and what should be done about it. Competition and Stability in Banking addresses the critical relationships between competition, regulation, and stability, and the implications of coordinating banking regulations with competition policies. Xavier Vives argues that while competition is not responsible for fragility in banking, there are trade-offs between competition and stability. Well-designed regulations would alleviate these trade-offs but not eliminate them, and the specificity of competition in banking should be accounted for. Vives argues that regulation and competition policy should be coordinated, with tighter prudential requirements in more competitive situations, but he also shows that supervisory and competition authorities should stand separate from each other, each pursuing its own objective. Vives reviews the theory and empirics of banking competition, drawing on up-to-date analysis that incorporates the characteristics of modern market-based banking, and he looks at regulation, competition policies, and crisis interventions in Europe and the United States, as well as in emerging economies. Focusing on why banking competition policies are necessary, Competition and Stability in Banking examines regulation's impact on the industry's efficiency and effectiveness.

Download or read book Competition and Bank Risk the Role of Securitization and Bank Capital written by Yener Altunbas and published by International Monetary Fund. This book was released on 2019-07-02 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine how bank competition in the run-up to the 2007–2009 crisis affects banks’ systemic risk during the crisis. We then investigate whether this effect is influenced by two key bank characteristics: securitization and bank capital. Using a sample of the largest listed banks from 15 countries, we find that greater market power at the bank level and higher competition at the industry level lead to higher realized systemic risk. The results suggest that the use of securitization exacerbates the effects of market power on the systemic dimension of bank risk, while capitalization partially mitigates its impact.

Download or read book How Does Competition Impact Bank Risk taking written by Damian Kok Huat Oh and published by . This book was released on 2008 with total page 138 pages. Available in PDF, EPUB and Kindle. Book excerpt: