Does Competition make Banks more Risk-seeking?

Stefan Arping

No 14-059/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This article presents a model in which, contrary to conventional wisdom, competi- tion can make banks more reluctant to take excessive risks: As competition intensifies and margins decline, banks face more-binding threats of failure, to which they may respond by reducing their risk-taking. Yet, at the same time, banks become riskier. This is because the direct, destabilizing effect of lower margins outweighs the disciplining effect of competition; moreover, a substantial rise in competition reduces banks’ incentive to build precautionary capital buffers. A key implication is that the effects of competition on risk-taking and on failure risk can move in opposite directions.

Keywords: Charter Value Hypothesis; Bank Franchise Value; Bank Competition; Financial Stability; Capital Requirements (search for similar items in EconPapers)
JEL-codes: G2 G3 (search for similar items in EconPapers)
Date: 2014-05-12
New Economics Papers: this item is included in nep-ban and nep-com
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Citations: View citations in EconPapers (1)

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