The relationship between banking market competition and risk-taking: Do size and capitalization matter?

Benjamin Tabak, Dimas Fazio and Daniel Cajueiro

Journal of Banking & Finance, 2012, vol. 36, issue 12, 3366-3381

Abstract: This paper addresses the effects of bank competition on the risk-taking behaviors of banks in 10 Latin American countries between 2003 and 2008. We conduct our empirical approach in two steps. First, we estimate the Boone indicator, which is a measure of competition. We then regress this measure and other explanatory variables on the banking “stability inefficiency” derived simultaneously from the estimation of a stability stochastic frontier. Unlike previous findings, this paper concludes that competition affects risk-taking behavior in a non-linear way as both high and low competition levels enhance financial stability, while we find the opposite effect for average competition. In addition, bank size and capitalization are essential factors in explaining this relationship. On the one hand, the larger a bank is, the more it benefits from competition. On the other hand, a greater capital ratio is advantageous for banks that operate in collusive markets, while capitalization only enhances the stability of larger banks under high and average competition. These results are of extreme importance when considering bank regulations, especially in light of the recent turmoil in the global financial markets.

Keywords: Bank competition; Emerging markets; Financial stability; Bank regulation (search for similar items in EconPapers)
JEL-codes: D40 G21 G28 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (175)

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Working Paper: The Relationship Between Banking Market Competition and Risk-taking: Do Size and Capitalization Matter? (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:12:p:3366-3381

DOI: 10.1016/j.jbankfin.2012.07.022

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