Bank Competition and Financial Stability

By Allen N. Berger, L. Klapper, Rima Turk-Ariss. 2008

1,340 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/9873e8d86a298b3ffebe18333aa6ca4003d6fb79

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Citations in the corpus

Financial liberalization and bank risk-taking: International evidence (2014, background): “, 1997; among others), Japanese banks (Konishi and Yasuda, 2004), a sample of EU banks (Gropp and Vesala, 2004), and for a sample of more than 30 countries (González, 2005; Berger et al., 2009).”
The Impact of Financial Inclusion on Economic Growth, Poverty, Income Inequality, and Financial Stability in Asia (2020, methodology): “Bank Z-score is used as an indicator to measure financial stability that describes the probability of bank insolvency or bankruptcy; the higher the score, the better the financial stability is (Berger et al., 2009).”
A framework for analyzing competition in the banking sector : an application to the case of Jordan (2010, methodology): “Following the approach in Fernandez de Guevara et al. (2005, 2007) and Berger et al. (2008), who proxy banking production by total assets, P is calculated as total bank revenue over assets and MC is calculated by taking the derivative from a translog cost function as specified in equation (4)…”
Bank Competition and Financial Stability: Evidence from the Financial Crisis (2016, result): “Berger, Klapper, and Turk-Ariss (2009) find results generally consistent with this theory—banks with higher market power generally have less overall risk exposure.”
Market power, revenue diversification and bank stability: Evidence from selected South Asian countries (2012, methodology): “We also control for bank market saturation using a three bank concentration ratio (3kCONCENTRATION) (Bikker and Haaf, 2002).”
Competition and risk in South East Asian commercial banking (2012, methodology): “Others, in contrast, use the H-statistic to explain bank performance (Buchs and Mathisen, 2005) or, as we have already discussed, bank risk-taking behaviour (Schaeck et al., 2006; Yeyati and Micco, 2007; Berger et al., 2009).”