Banking competition and risk-taking when borrowers care about financial prudence : [Version: Mai 2009]

  • Corporate borrowers care about the overall riskiness of a bank’s operations as their continued access to credit may rely on the bank’s ability to roll over loans or to expand existing credit facilities. As we show, a key implication of this observation is that increasing competition among banks should have an asymmetric impact on banks’ incentives to take on risk: Banks that are already riskier will take on yet more risk, while their safer rivals will become even more prudent. Our results offer new guidance for bank supervision in an increasingly competitive environment and may help to explain existing, ambiguous findings on the relationship between competition and risk-taking in banking. Furthermore, our results stress the beneficial role that competition can have for financial stability as it turns a bank’s "prudence" into an important competitive advantage.

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Author:Hasan Doluca, Roman InderstORCiDGND, Ufuk Otag
Parent Title (German):Working paper series / Institute for Monetary and Financial Stability ; 28
Series (Serial Number):Working paper series / Institute for Monetary and Financial Stability (28)
Document Type:Working Paper
Year of Completion:2009
Year of first Publication:2009
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2009/12/08
GND Keyword:Bank; Risiko; Wettbewerb; Kreditgewährung
Issue:Version: Mai 2009
First complete version August 2008; This version Mai 2009
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Institute for Monetary and Financial Stability (IMFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht