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 "competition-stability" view, more market power in the loan mark...

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Main Authors:	Berger, Allen N., Klapper, Leora F., Turk-Ariss, Rima
Format:	Journal Article
Language:	EN
Published:	2012
Subjects:	Banks Other Depository Institutions Micro Finance Institutions Mortgages G210 Financing Policy Financial Risk and Risk Management Capital and Ownership Structure G320 Production, Pricing, and Market Structure Size Distribution of Firms L110 Firm Performance: Size, Diversification, and Scope L250
Online Access:	http://hdl.handle.net/10986/5409

id	okr-10986-5409
recordtype	oai_dc
spelling	okr-10986-54092021-04-23T14:02:22Z Bank Competition and Financial Stability Berger, Allen N. Klapper, Leora F. Turk-Ariss, Rima Banks Other Depository Institutions Micro Finance Institutions Mortgages G210 Financing Policy Financial Risk and Risk Management Capital and Ownership Structure G320 Production, Pricing, and Market Structure Size Distribution of Firms L110 Firm Performance: Size, Diversification, and Scope L250 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 higher bank risk as the higher interest rates charged to loan customers make it harder to repay loans, and exacerbate moral hazard and adverse selection problems. The two strands of the literature need not necessarily yield opposing predictions regarding the effects of competition and market power on stability in banking. 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. We 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. Our results suggest that--consistent with the traditional "competition-fragility" view--banks with a higher degree of market power also have less overall risk exposure. The data also provides some support for one element of the "competition-stability" view--that market power increases loan portfolio risk. We show that this risk may be offset in part by higher equity capital ratios. 2012-03-30T07:32:41Z 2012-03-30T07:32:41Z 2009 Journal Article Journal of Financial Services Research 09208550 http://hdl.handle.net/10986/5409 EN http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Journal Article
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	EN
topic	Banks Other Depository Institutions Micro Finance Institutions Mortgages G210 Financing Policy Financial Risk and Risk Management Capital and Ownership Structure G320 Production, Pricing, and Market Structure Size Distribution of Firms L110 Firm Performance: Size, Diversification, and Scope L250
spellingShingle	Banks Other Depository Institutions Micro Finance Institutions Mortgages G210 Financing Policy Financial Risk and Risk Management Capital and Ownership Structure G320 Production, Pricing, and Market Structure Size Distribution of Firms L110 Firm Performance: Size, Diversification, and Scope L250 Berger, Allen N. Klapper, Leora F. Turk-Ariss, Rima Bank Competition and Financial Stability
relation	http://creativecommons.org/licenses/by-nc-nd/3.0/igo
description	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 higher bank risk as the higher interest rates charged to loan customers make it harder to repay loans, and exacerbate moral hazard and adverse selection problems. The two strands of the literature need not necessarily yield opposing predictions regarding the effects of competition and market power on stability in banking. 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. We 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. Our results suggest that--consistent with the traditional "competition-fragility" view--banks with a higher degree of market power also have less overall risk exposure. The data also provides some support for one element of the "competition-stability" view--that market power increases loan portfolio risk. We show that this risk may be offset in part by higher equity capital ratios.
format	Journal Article
author	Berger, Allen N. Klapper, Leora F. Turk-Ariss, Rima
author_facet	Berger, Allen N. Klapper, Leora F. Turk-Ariss, Rima
author_sort	Berger, Allen N.
title	Bank Competition and Financial Stability
title_short	Bank Competition and Financial Stability
title_full	Bank Competition and Financial Stability
title_fullStr	Bank Competition and Financial Stability
title_full_unstemmed	Bank Competition and Financial Stability
title_sort	bank competition and financial stability
publishDate	2012
url	http://hdl.handle.net/10986/5409
_version_	1764394950886162432

Bank Competition and Financial Stability

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