Does Market Concentration Preclude Risk Taking in Banking?

Kaniska Dam and Santiago Sánchez-Pagés

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

Abstract: We analyse risk-taking behaviour of banks in the context of a model based on spatial competition. Banks mobilise deposits by offering deposit rates. We show that when the market concentration is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market concentration, all banks choose the prudent asset to invest in, and some depositors may even be left out of the market. Our results suggest a discontinuous relation between market concentration and social welfare. We also show that, in a regime of high deposit insurance, banks are more likely to gamble.

Keywords: financial intermediation; risk-taking; market concentration (search for similar items in EconPapers)
JEL-codes: G21 L11 L13 (search for similar items in EconPapers)
Pages: 28
Date: 2004-02
New Economics Papers: this item is included in nep-com and nep-reg
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http://www.econ.ed.ac.uk/papers/id120_esedps.pdf

Related works:
Working Paper: Does Market Concentration Preclude Risk Taking in Baking? (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:120

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