Bank Risk Taking And Competition Revisited

Author : Mr.Gianni De Nicolo,John H. Boyd
Publisher : International Monetary Fund
Page : 25 pages
File Size : 45,7 Mb
Release : 2003-06-01
Category : Business & Economics
ISBN : 9781451853810

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Bank Risk-Taking and Competition Revisited by Mr.Gianni De Nicolo,John H. Boyd Pdf

This study reinvestigates the theoretical relationship between competition in banking and banks' exposure to risk of failure. There is a large existing literature that concludes that when banks are confronted with increased competition, they rationally choose more risky portfolios. We briefly review this literature and argue that it has had a significant influence on regulators and central bankers, causing them to take a less favorable view of competition and encouraging anti-competitive consolidation as a response to banking instability. We then show that existing theoretical analyses of this topic are fragile, since they do not detect two fundamental risk-incentive mechanisms that operate in exactly the opposite direction, causing banks to aquire more risk per portfolios as their markets become more concentrated. We argue that these mechanisms should be essential ingredients of models of bank competition.

Author : Mr.Gianni De Nicolo,John H. Boyd,Abu M. Jalal
Publisher : International Monetary Fund
Page : 51 pages
File Size : 50,5 Mb
Release : 2006-12-01
Category : Business & Economics
ISBN : 9781451865578

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Bank Risk-Taking and Competition Revisited by Mr.Gianni De Nicolo,John H. Boyd,Abu M. Jalal Pdf

This paper studies two new models in which banks face a non-trivial asset allocation decision. The first model (CVH) predicts a negative relationship between banks' risk of failure and concentration, indicating a trade-off between competition and stability. The second model (BDN) predicts a positive relationship, suggesting no such trade-off exists. Both models can predict a negative relationship between concentration and bank loan-to-asset ratios, and a nonmonotonic relationship between bank concentration and profitability. We explore these predictions empirically using a cross-sectional sample of about 2,500 U.S. banks in 2003 and a panel data set of about 2,600 banks in 134 nonindustrialized countries for 1993-2004. In both these samples, we find that banks' probability of failure is positively and significantly related to concentration, loan-to-asset ratios are negatively and significantly related to concentration, and bank profits are positively and significantly related to concentration. Thus, the risk predictions of the CVH model are rejected, those of the BDN model are not, there is no trade-off between bank competition and stability, and bank competition fosters the willingness of banks to lend.

Author : Alan Xiaochen Feng
Publisher : International Monetary Fund
Page : 46 pages
File Size : 44,8 Mb
Release : 2018-07-06
Category : Business & Economics
ISBN : 9781484364024

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Bank Competition, Risk Taking, and their Consequences: Evidence from the U.S. Mortgage and Labor Markets by Alan Xiaochen Feng Pdf

Bank competition can induce excessive risk taking due to risk shifting. This paper tests this hypothesis using micro-level U.S. mortgage data by exploiting the exogenous variation in local house price volatility. The paper finds that, in response to high expected house price volatility, banks in U.S. counties with a competitive mortgage market lowered lending standards by twice as much as those with concentrated markets between 2000 and 2005. Such risk taking pattern was associated with real economic outcomes during the financial crisis, including higher unemployment rates in local real sectors.

Author : Thomas K. Kick
Publisher : Unknown
Page : 31 pages
File Size : 43,5 Mb
Release : 2016
Category : Electronic
ISBN : OCLC:1306009471

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Bank Risk Taking and Competition by Thomas K. Kick Pdf

This study investigates the bank competition-stability nexus using a unique regulatory dataset provided by the Deutsche Bundesbank over the period 1994 to 2010. First, we use outright bank defaults as the most direct measure of bank risk available and contrast the results to weaker forms of bank distress. Second, we control for a wide array of different time-varying characteristics of banks which are likely to influence the competition-risk taking channel. Third, we include different measures of competition, contestability and market power, each corresponding to a different contextual level of a bank's competitive environment. Our results indicate that political implications derived from empirical banking market studies must recognize the theoretical properties of the indicators for market power and competition. Using the Lerner Index as a proxy for bank-specific market power, our results support the view that market power tends to reduce banks' default probability. In contrast, using the Boone Indicator (derived on the state level) and/or the regional branch share as a measure of competition, we find strong support that increased competition lowers the riskiness of banks.

Author : Mr.Tito Cordella,Mr.Eduardo Levy Yeyati
Publisher : International Monetary Fund
Page : 46 pages
File Size : 44,7 Mb
Release : 1998-06-01
Category : Business & Economics
ISBN : 9781451851991

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Financial Opening, Deposit Insurance, and Risk in a Model of Banking Competition by Mr.Tito Cordella,Mr.Eduardo Levy Yeyati Pdf

This paper studies the impact of competition on the determination of interest rates and banks’ risk-taking behavior under different assumptions about deposit insurance and the dissemination of financial information. It finds that lower entry costs foster competition in deposit rate sand reduce banks’ incentives to limit risk exposure. Although higher insurance coverage amplifies this effect, two alternative arrangements (risk-based contributions to the insurance fund and public disclosure of financial information) help to reduce it. Moreover, uninsured but fully informed depositors and risk-based full deposit insurance yield the same equilibrium risk level, which is independent of entry costs. The welfare implications of the different arrangements are also explored.

Author : Thomas Kick,Esteban Prieto
Publisher : Unknown
Page : 25 pages
File Size : 44,5 Mb
Release : 2013
Category : Electronic
ISBN : 3865589464

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Bank Risk Taking and Competition by Thomas Kick,Esteban Prieto Pdf

Author : Natalya Martynova,Mr.Lev Ratnovski,Mr.Razvan Vlahu
Publisher : International Monetary Fund
Page : 44 pages
File Size : 41,8 Mb
Release : 2015-11-25
Category : Business & Economics
ISBN : 9781513517582

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Bank Profitability and Risk-Taking by Natalya Martynova,Mr.Lev Ratnovski,Mr.Razvan Vlahu Pdf

Traditional theory suggests that more profitable banks should have lower risk-taking incentives. Then why did many profitable banks choose to invest in untested financial instruments before the crisis, realizing significant losses? We attempt to reconcile theory and evidence. In our setup, banks are endowed with a fixed core business. They take risk by levering up to engage in risky ‘side activities’(such as market-based investments) alongside the core business. A more profitable core business allows a bank to borrow more and take side risks on a larger scale, offsetting lower incentives to take risk of given size. Consequently, more profitable banks may have higher risk-taking incentives. The framework is consistent with cross-sectional patterns of bank risk-taking in the run up to the recent financial crisis.

Author : Gianni De Nicoló,John H. Boyd,Abu M. Jalal
Publisher : International Monetary Fund
Page : 42 pages
File Size : 46,9 Mb
Release : 2009-07
Category : Business & Economics
ISBN : IND:30000111481812

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Bank Competition, Risk and Asset Allocations by Gianni De Nicoló,John H. Boyd,Abu M. Jalal Pdf

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.

Author : Yener Altunbas,David Marques-Ibanez,Michiel van Leuvensteijn,Tianshu Zhao
Publisher : International Monetary Fund
Page : 39 pages
File Size : 44,8 Mb
Release : 2019-07-02
Category : Business & Economics
ISBN : 9781498318501

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Competition and Bank Risk the Role of Securitization and Bank Capital by Yener Altunbas,David Marques-Ibanez,Michiel van Leuvensteijn,Tianshu Zhao Pdf

We examine how bank competition in the run-up to the 2007–2009 crisis affects banks’ systemic risk during the crisis. We then investigate whether this effect is influenced by two key bank characteristics: securitization and bank capital. Using a sample of the largest listed banks from 15 countries, we find that greater market power at the bank level and higher competition at the industry level lead to higher realized systemic risk. The results suggest that the use of securitization exacerbates the effects of market power on the systemic dimension of bank risk, while capitalization partially mitigates its impact.

Author : Mr.Lev Ratnovski
Publisher : International Monetary Fund
Page : 20 pages
File Size : 52,7 Mb
Release : 2013-05-23
Category : Business & Economics
ISBN : 9781484354728

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Competition Policy for Modern Banks by Mr.Lev Ratnovski Pdf

Traditional bank competition policy seeks to balance efficiency with incentives to take risk. The main tools are rules guiding entry/exit and consolidation of banks. This paper seeks to refine this view in light of recent changes to financial services provision. Modern banking is largely market-based and contestable. Consequently, banks in advanced economies today have structurally low charter values and high incentives to take risk. In such an environment, traditional policies that seek to affect the degree of competition by focusing on market structure (i.e. concentration) may have limited effect. We argue that bank competition policy should be reoriented to deal with the too-big-to-fail (TBTF) problem. It should also focus on the permissible scope of activities rather than on market structure of banks. And following a crisis, competition policy should facilitate resolution by temporarily allowing higher concentration and government control of banks.

Author : Mr.Gianni De Nicolo,Marcella Lucchetta
Publisher : International Monetary Fund
Page : 39 pages
File Size : 41,7 Mb
Release : 2011-12-01
Category : Business & Economics
ISBN : 9781463927295

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Bank Competition and Financial Stability by Mr.Gianni De Nicolo,Marcella Lucchetta Pdf

We study versions of a general equilibrium banking model with moral hazard under either constant or increasing returns to scale of the intermediation technology used by banks to screen and/or monitor borrowers. If the intermediation technology exhibits increasing returns to scale, or it is relatively efficient, then perfect competition is optimal and supports the lowest feasible level of bank risk. Conversely, if the intermediation technology exhibits constant returns to scale, or is relatively inefficient, then imperfect competition and intermediate levels of bank risks are optimal. These results are empirically relevant and carry significant implications for financial policy.

Author : Erik Banks
Publisher : John Wiley & Sons
Page : 156 pages
File Size : 52,6 Mb
Release : 2003-03-14
Category : Business & Economics
ISBN : 9780470856314

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The Simple Rules of Risk by Erik Banks Pdf

In an age where companies and financial institutions are keenly focused on managing the financial risk of their operations, the implementation of quantitative methods and models has been of tremendous help. Tools such as VaR, credit VaR, risk-adjusted returns, and scenario analyses have given institutions the means to quantify and understand their risk profiles. However, the focus on quantitative risk management, while important, can sometimes be over-emphasized--at the expense of logic and experience. At its core, the successful management of risk is still largely an "art." The Simple Rules of Risk takes a fresh look at the qualitative aspects of risk management. It also considers how qualitative approaches can make optimal use of the mathematical aspects of risk management to create the most effective framework possible.

Author : S. Frowen,F. McHugh
Publisher : Springer
Page : 320 pages
File Size : 52,8 Mb
Release : 2016-04-30
Category : Business & Economics
ISBN : 9781349652365

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Financial Competition, Risk and Accountability by S. Frowen,F. McHugh Pdf

Recent decades have seen a sharp increase in financial competition, intensified by globalisation. Excessive risk-taking leading to inevitable business failures at times reached worrying proportions. A contributing factor arose from the complexities of the derivative and other new markets. This volume attempts to analyse and explain financial market developments at the turn of the millennium with the emphasis on the need for greater responsibility and a more ethical approach to financial decision-making.

Author : Mr.Giovanni Dell'Ariccia,Mr.Lev Ratnovski
Publisher : International Monetary Fund
Page : 28 pages
File Size : 43,8 Mb
Release : 2013-11-12
Category : Business & Economics
ISBN : 9781475514742

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Bailouts and Systemic Insurance by Mr.Giovanni Dell'Ariccia,Mr.Lev Ratnovski Pdf

We revisit the link between bailouts and bank risk taking. The expectation of government support to failing banks creates moral hazard—increases bank risk taking. However, when a bank’s success depends on both its effort and the overall stability of the banking system, a government’s commitment to shield banks from contagion may increase their incentives to invest prudently and so reduce bank risk taking. This systemic insurance effect will be relatively more important when bailout rents are low and the risk of contagion (upon a bank failure) is high. The optimal policy may then be not to try to avoid bailouts, but to make them “effective”: associated with lower rents.

Author : Mr.Giovanni Dell'Ariccia,Mr.Luc Laeven,Mr.Gustavo Suarez
Publisher : International Monetary Fund
Page : 41 pages
File Size : 50,5 Mb
Release : 2013-06-06
Category : Business & Economics
ISBN : 9781484381137

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Bank Leverage and Monetary Policy's Risk-Taking Channel by Mr.Giovanni Dell'Ariccia,Mr.Luc Laeven,Mr.Gustavo Suarez Pdf

We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (as measured by the risk rating of the bank’s loan portfolio) is negatively associated with increases in short-term policy interest rates. This relationship is less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally.