Competition and risk taking in banking: The charter value hypothesis revisited

Stefan Arping

Journal of Banking & Finance, 2019, vol. 107, issue C, -

Abstract: Conventional wisdom suggests that greater competition in banking, by eroding bank charter values, exacerbates banks’ incentives to take excessive risks. This paper presents a model in which, contrary to this view, competition can cause banks to act more prudently: As competition intensifies and profit margins decline, banks face more-binding threats of failure, to which they may respond by taking lower risks. Nonetheless, competition is unambiguously destabilizing in this model: The direct effect of lower margins on bank failure rates always outweighs the prudence effect. A key implication is that the effects of competition on bank risk taking and on failure risk can move in opposite directions.

Keywords: Banking competition; Bank risk taking; Charter value hypothesis; Financial stability (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:107:y:2019:i:c:4

DOI: 10.1016/j.jbankfin.2019.105609

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