Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2014-05-12
Number: 14-059/IV
Author-Name: Stefan Arping
Author-Workplace-Name: University of Amsterdam
Title: Does Competition make Banks more Risk-seeking?
Abstract: This article presents a model in which, contrary to conventional wisdom, competi- tion can make banks more reluctant to take excessive risks: As competition intensifies and margins decline, banks face more-binding threats of failure, to which they may respond by reducing their risk-taking. Yet, at the same time, banks become riskier. This is because the direct, destabilizing effect of lower margins outweighs the disciplining effect of competition; moreover, a substantial rise in competition reduces banks’ incentive to build precautionary capital buffers. A key implication is that the effects of competition on risk-taking and on failure risk can move in opposite directions.
Classification-JEL: G2, G3
Keywords: Charter Value Hypothesis, Bank Franchise Value, Bank Competition, Financial Stability, Capital Requirements
File-Url: https://papers.tinbergen.nl/14059.pdf
File-Format: application/pdf
File-Size: 433788 bytes
Handle: RePEc:tin:wpaper:20140059