Competition and Bank Risk the Role of Securitization and Bank Capital (original) (raw)
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Competition and Bank Risk The Effect of Securitization and Bank Capital
We find that the increased use of securitization activity in the banking sector prior to the 2007-2009 crisis augmented the effect of competition on realized bank risk (i.e. more intense competition and greater use of securitization is correlated with higher levels of realized risk) during the crisis. In contrast, higher levels of capital did not buffer the impact of competition on realized risk. It follows that cooperation between supervisory and competition authorities is warranted to account for the stability implications of financial innovation and capital regulation.
2017
Using a sample of 104,771 bank-year end data of the US commercial banks, we investigate the impact of the joint interaction between bank competition and securitization on risk and profitability. Our main findings show that Lerner index has a negative impact on bank risk and a positive impact on bank profitability. We also find that securitization has a positive impact on bank profitability prior to the recent financial crisis. The interaction between competition and securitization is found to have a negative impact on bank profitability and a positive impact on bank risk prior, during and after the crisis. Our paper emphasizes empirically the importance of the regulations restricting the recent expansion of bank competition, and provides new insights into the effects of competition and securitization on banks’ risk and return.
Bank Competition and Financial Stability
Journal of Financial Services Research, 2008
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 "competitionstability" view-that market power increases loan portfolio risk. We show that this risk may be offset in part by higher equity capital ratios.
Journal of International Money and Finance, 2013
This paper studies the influence of bank competition on the real effect of 36 systemic banking crises in 30 countries over the 1980-2000 period and how this influence varies across countries depending on bank regulation and institutions. We find that bank market power is not on average useful for mitigating the negative real effect of a systemic banking crisis. Market power promotes higher growth during normal times in industries that are more dependent on external finance but induces a bigger reduction in growth during systemic banking crises. We also find a country-specific effect depending on bank regulation and institutions. Stringent capital requirements and poor protection of creditor rights increase the benefits of bank market power for mitigating the negative real effect of a systemic banking crisis because bank market power has a positive effect on economic growth during both crisis and non-crisis periods in these environments.
2019
The relationship between competition and banking stability has resulted in two opposing paradigms; competition-fragility view suggests that increased competition erodes market power and encourages banks to take excessive risks. In contrast, the competition-stability view suggests that, low competition results in more market power which may encourage the banks to charge higher loan rates adversely affecting borrowers by risk shifting mechanisms. Given these opposing predictions in the literature, this study aims to test the two views, considering the effects of market power and capital requirements on the riskiness of Pakistani banks. Utilizing annual data for 30 banks over the period of 2004 to 2017, in a dynamic two step system GMM. We construct Lerner index as a direct measure of market power for the banking industry. Our findings support the competition stability paradigm in the case of Pakistan. We also find that the theoretical link between capitalization ratio and market power...
How Does Bank Competition Affect Systemic Banking Crises?
Colombo Business Journal
Literature present conflicting views on the effect of bank competition on financial stability. Some argue that competition increases adverse shocks in the financial system while others argue that it reduces the likelihood of such events. The purpose of this study is to further examine this relationship using a more recent systemic banking crises database of Laeven and Valencia (2018). There are 61 countries which had experienced systemic crises during 1996-2017. This study used Lerner index and Boone indicator as proxy measures of competition and three estimation techniques to estimate the relationship. The results indicate that the effect of competition on financial stability varies with estimation techniques and proxy measures of competition and stability. Lerner index indicates that competition increases financial instability while Boone indicator shows the opposite. Thus, this study concludes with mixed evidence on the relationship between bank competition and financial stability.
Banking Competition and Stability: The Role of Leverage
SSRN Electronic Journal, 2000
This paper reexamines the classical issue of the possible trade-offs between banking competition and financial stability by highlighting different types of risk and the role of leverage. By means of a simple model we show that competition can affect portfolio risk, insolvency risk, liquidity risk, and systemic risk differently. The effect depends crucially on banks' liability structure, on whether banks are financed by insured retail deposits or by uninsured wholesale debts, and on whether the indebtness is exogenous or endogenous. In particular we suggest that, while in a classical originate-to-hold banking industry competition might increase financial stability, the opposite can be true for an originate-to-distribute banking industry of a larger fraction of market short-term funding. This leads us to revisit the existing empirical literature using a more precise classification of risk. Our theoretical model therefore helps to clarify a number of apparently contradictory empirical results and proposes new ways to analyze the impact of banking competition on financial stability.
Bank concentration, competition, and crises: First results
Journal of Banking & Finance, 2006
GDP per capita is in constant dollars, averaged over the entire sample period. Crisis period denotes the years in which each country experienced a systemic banking crisis and the duration of said crisis. Concentration is calculated as the fraction of assets held by the three largest banks in each country, averaged over the sample period. Crisis Definition is coded 1 for crises wherein non-performing loans exceeded 10%, 2 for cost of crisis greater than 2% of GDP, 3 for crises where the majority of the banks were insolvent and emergency measures were taken and 4 for crises where large-scale nationalization took place. Detailed variable definitions and sources are given in the data appendix.