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How Does Competition Impact Bank Risk-Taking?

Gabriel Jimenez, Jose Lopez and Jesús Saurina ()

No 1005, Working Papers from Banco de España

Abstract: A common assumption in the academic literature is that franchise value plays a key role in limiting bank risk-taking. As market power is the primary source of franchise value, reduced competition in banking markets has been seen as promoting banking stability. We test this hypothesis using data for the Spanish banking system. We find that standard measures of market concentration do not affect bank risk-taking. However, we find a negative relationship between market power measured using Lerner indexes based on bank-specific interest rates and bank risk. Our results support the franchise value paradigm.

Keywords: bank competition; franchise value; Lerner index; credit risk; financial stability (search for similar items in EconPapers)
JEL-codes: G21 L11 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2010-03
New Economics Papers: this item is included in nep-ban, nep-bec, nep-com, nep-mic and nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (53)

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Related works:
Working Paper: How does competition impact bank risk-taking? (2007) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1005

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