Competition and Bank Risk Taking in a Differntiated Oligopoly

Kaniska Dam (kaniska.dam@cide.edu) and Martín Basurto
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Martín Basurto: Division of Economics, CIDE

No DTE 583, Working Papers from CIDE, División de Economía

Abstract: We re-examine the relationship between the degree of deposit market competition and bank risk taking in a model where banks compete in differentiated deposit services. When banks invest their deposits directly, as has already been established in the extant literature, an increased degree of competition, measured either by greater degree of substitutability or by greater number of banks, induces the banks to take more risk in equilibrium. When banks invest their deposits in loans, and their borrowers choose the level of risk, the risk of bank failure is independent of the degree of competition in the deposit market.

Keywords: Bank competition; risk taking; loan contracts. (search for similar items in EconPapers)
Pages: 8 pages
Date: 2015-03
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