On the Relationship between Market Power and Bank Risk Taking

Kaniska Dam (), Marc Escrihuela-Villar () and Santiago Sánchez Pages Sánchez Pages
Additional contact information
Kaniska Dam: Division of Economics, CIDE
Authors registered in the RePEc Author Service: Santiago Sánchez-Pagés

No DTE 459, Working Papers from CIDE, División de Economía

Abstract: We analyse risk-taking behaviour of banks in the context of spatial competition. Banks mobilise unsecured deposits by offering deposit rates, which they invest either in a prudent or a gambling asset. Limited liability along with high return of a successful gamble induce moral hazard at the bank level. We show that when the market power is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market power, all banks choose the prudent asset to invest in. We further show that a merger of two neighboring banks increases the likelihood of prudent behaviour. Finally, introduction of a deposit insurance scheme exacerbates banks' moral hazard problem.

Keywords: Market Power; Bank Risk (search for similar items in EconPapers)
JEL-codes: D43 G32 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2009-09
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.economiamexicana.cide.edu/RePEc/emc/pdf/DTE/DTE459.pdf (application/pdf)

Related works:
Journal Article: On the relationship between market power and bank risk taking (2015)
Working Paper: On the Relationship between Market Power and Bank Risk Taking (2009)
Working Paper: On the Relationship between Market Power and Bank Risk Taking (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:emc:wpaper:dte459

Access Statistics for this paper

More papers in Working Papers from CIDE, División de Economía Contact information at EDIRC.
Bibliographic data for series maintained by Mateo Hoyos ().