Bank Competition and Financial Stability
Under the traditional "competition-fragility" view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative "com...
| Main Authors: | , , |
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| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2008/08/9781899/bank-competition-financial-stability http://hdl.handle.net/10986/6794 |
| Summary: | Under the traditional
"competition-fragility" view, more bank
competition erodes market power, decreases profit margins,
and results in reduced franchise value that encourages bank
risk taking. Under the alternative
"competition-stability" view, more market power in
the loan market may result in greater bank risk as the
higher interest rates charged to loan customers make it more
difficult to repay loans and exacerbate moral hazard and
adverse selection problems. But even if market power in the
loan market results in riskier loan portfolios, the overall
risks of banks need not increase if banks protect their
franchise values by increasing their equity capital or
engaging in other risk-mitigating techniques. The authors
test these theories by regressing measures of loan risk,
bank risk, and bank equity capital on several measures of
market power, as well as indicators of the business
environment, using data for 8,235 banks in 23 developed
nations. The results suggest that - consistent with the
traditional "competition-fragility" view - banks
with a greater degree of market power also have less overall
risk exposure. The data also provide some support for one
element of the "competition-stability" view - that
market power increases loan portfolio risk. The authors show
that this risk may be offset in part by higher equity
capital ratios. |
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