The Relationship Between Banking Market Competition and Risk-taking: Do Size and Capitalization Matter?

Benjamin Tabak, Dimas Fazio and Daniel Cajueiro

No 261, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper aims to study the effect of banking competition on Latin American banks' risk-taking and whether capitalization and size changes this relationship. We conclude that: (1) competition affects risk in a non-linear manner: high/low (average) competition are related to more (less) stability; (2) bank's size explains the advantage from competition, while capitalization is only positive for larger banks in this case; (3) capital ratio explains the advantage from lower competition. These results are of uttermost importance for bank regulation, especially due to the recent turmoil in worldwide financial markets.

Date: 2011-11
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Journal Article: The relationship between banking market competition and risk-taking: Do size and capitalization matter? (2012)
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