Bank Competition, Risk and Asset Allocations

By John H. Boyd, Gianni De Nicolò, Abu M. Jalal. Social Science Research Network, 2009

111 citations recorded by the source corpus.

We study a banking model in which banks invest in a riskless asset and compete in both deposit and risky loan markets. The model predicts that as competition increases, both loans and assets increase; however, the effect on the loans-to-assets ratio is ambiguous. Similarly, as competition increases, the probability of bank failure can either increase or decrease. We explore these predictions empirically using a cross-sectional sample of 2,500 U.S. banks in 2003, and a panel data set of about 2600 banks in 134 non-industrialized countries for the period 1993-2004. With both samples, we find that banks' probability of failure is negatively and significantly related to measures of competition, and that the loan-to-asset ratio is positively and significantly related to measures of competition. Furthermore, several loan loss measures commonly employed in the literature are negatively and significantly related to measures of bank competition. Thus, there is no evidence of a trade-off between bank competition and stability, and bank competition seems to foster banks' willingness to lend.

View Paper: https://www.semanticscholar.org/paper/ec4a36f3b5633af1042db656ba95abb7737ed16b

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Citations in the corpus

• Bank Competition and Financial Stability: Evidence from the Financial Crisis (2016, result): “…that when bank competition is higher, the bankruptcy risk of the bank is lower, borrower risk is lower, and the loan-to-asset ratio is higher, consistent with the predictions about the impact of bank competition on bank risk and asset allocations in the model by Boyd, De Nicoló, and Jalal (2009).”
• Cross-Border Interbank Networks, Banking Risk and Contagion (2015, background): “Also, there are studies that analyse factors which might cause banking crises or determine the stability of banks while ignoring effects coming from international exposures of a banking system (Beck et al., 2006; Boyd et al., 2009).”