IDEAS home Printed from https://ideas.repec.org/a/bla/irvfin/v22y2022i4p688-724.html
   My bibliography  Save this article

Bank risk‐taking in a mixed duopoly: The role of the state‐owned bank

Author

Listed:
  • Ping‐Lun Tseng
  • Wen‐Chung Guo

Abstract

We analyze the role of a state‐owned bank, whose objective is to maximize social welfare, in a credit market with a mixed duopoly. The equilibrium reveals that the state‐owned bank is exposed to lower credit risk than the private bank. Furthermore, when the deposit rate is raised by the monetary authority, both banks exert socially beneficial higher monitoring efforts. In modified models, we explore the effects of the cost‐inefficiency and the political view of the state‐owned bank. Extensions on partial nationalization, mixed oligopoly with multiple private banks, and the case of loan differentiation with price competition are also discussed.

Suggested Citation

  • Ping‐Lun Tseng & Wen‐Chung Guo, 2022. "Bank risk‐taking in a mixed duopoly: The role of the state‐owned bank," International Review of Finance, International Review of Finance Ltd., vol. 22(4), pages 688-724, December.
    • Handle: RePEc:bla:irvfin:v:22:y:2022:i:4:p:688-724
    DOI: 10.1111/irfi.12366
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/irfi.12366
    Download Restriction: no
    File URL: https://libkey.io/10.1111/irfi.12366?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Bibhas Saha & Rudra Sensarma, 2011. "Mixed Ownership, Managerial Incentives And Bank Competition," Bulletin of Economic Research, Wiley Blackwell, vol. 63(4), pages 385-403, October.
    2. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, vol. 72(2), pages 357-384, May.
    3. Repullo, Rafael, 2004. "Capital requirements, market power, and risk-taking in banking," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 156-182, April.
    4. Arnoud W. A. Boot & Anjan V. Thakor, 2000. "Can Relationship Banking Survive Competition?," Journal of Finance, American Finance Association, vol. 55(2), pages 679-713, April.
    5. Laeven,Luc A., 1999. "Risk and efficiency in East Asian banks," Policy Research Working Paper Series 2255, The World Bank.
    6. Franklin Allen & Elena Carletti, 2010. "An Overview of the Crisis: Causes, Consequences, and Solutions-super-," International Review of Finance, International Review of Finance Ltd., vol. 10(s1), pages 1-26.
    7. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 2002. "Government Ownership of Banks," Journal of Finance, American Finance Association, vol. 57(1), pages 265-301, February.
    8. Inderst, Roman, 2013. "Prudence as a competitive advantage: On the effects of competition on banks' risk-taking incentives," European Economic Review, Elsevier, vol. 60(C), pages 127-143.
    9. Franklin Allen & Elena Carletti & Robert Marquez, 2011. "Credit Market Competition and Capital Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 983-1018.
    10. DellʼAriccia, Giovanni & Laeven, Luc & Marquez, Robert, 2014. "Real interest rates, leverage, and bank risk-taking," Journal of Economic Theory, Elsevier, vol. 149(C), pages 65-99.
    11. Micco, Alejandro & Panizza, Ugo & Yanez, Monica, 2007. "Bank ownership and performance. Does politics matter?," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 219-241, January.
    12. Franklin Allen & Douglas Gale, 2004. "Competition and financial stability," Proceedings, Federal Reserve Bank of Cleveland, pages 453-486.
    13. Svetlana Andrianova & Panicos Demetriades & Anja Shortland, 2012. "Government Ownership of Banks, Institutions and Economic Growth," Economica, London School of Economics and Political Science, vol. 79(315), pages 449-469, July.
    14. Altunbas, Yener & Evans, Lynne & Molyneux, Philip, 2001. "Bank Ownership and Efficiency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 926-954, November.
    15. Andrianova, Svetlana, 2012. "Public banks and financial stability," Economics Letters, Elsevier, vol. 116(1), pages 86-88.
    16. Fabiana Gomez & Jorge Ponce, 2014. "Bank Competition and Loan Quality," Journal of Financial Services Research, Springer;Western Finance Association, vol. 46(3), pages 215-233, December.
    17. Purroy, Pedro & Salas, Vicente, 2000. "Strategic competition in retail banking under expense preference behavior," Journal of Banking & Finance, Elsevier, vol. 24(5), pages 809-824, May.
    18. Gabriel Jiménez & Steven Ongena & José‐Luis Peydró & Jesús Saurina, 2014. "Hazardous Times for Monetary Policy: What Do Twenty‐Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk‐Taking?," Econometrica, Econometric Society, vol. 82(2), pages 463-505, March.
    19. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    20. John H. Boyd & Gianni De Nicoló, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, June.
    21. Iannotta, Giuliano & Nocera, Giacomo & Sironi, Andrea, 2013. "The impact of government ownership on bank risk," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 152-176.
    22. Barros, Fatima & Modesto, Leonor, 1999. "Portuguese banking sector: a mixed oligopoly?," International Journal of Industrial Organization, Elsevier, vol. 17(6), pages 869-886, August.
    23. Kaniska Dam & Marc Escrihuela-Villar & Santiago Sánchez-Pagés, 2015. "On the relationship between market power and bank risk taking," Journal of Economics, Springer, vol. 114(2), pages 177-204, March.
    24. David Martinez-Miera & Rafael Repullo, 2010. "Does Competition Reduce the Risk of Bank Failure?," The Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3638-3664, October.
    25. Bonin, John P. & Hasan, Iftekhar & Wachtel, Paul, 2005. "Bank performance, efficiency and ownership in transition countries," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 31-53, January.
    26. Berger, Allen N. & Clarke, George R.G. & Cull, Robert & Klapper, Leora & Udell, Gregory F., 2005. "Corporate governance and bank performance: A joint analysis of the static, selection, and dynamic effects of domestic, foreign, and state ownership," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2179-2221, August.
    27. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
    28. Matsumura, Toshihiro, 1998. "Partial privatization in mixed duopoly," Journal of Public Economics, Elsevier, vol. 70(3), pages 473-483, December.
    29. Cordella, Tito & Yeyati, Eduardo Levy, 2002. "Financial opening, deposit insurance, and risk in a model of banking competition," European Economic Review, Elsevier, vol. 46(3), pages 471-485, March.
    30. Brei, Michael & Schclarek, Alfredo, 2015. "A theoretical model of bank lending: Does ownership matter in times of crisis?," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 298-307.
    31. Andrianova, Svetlana & Demetriades, Panicos & Shortland, Anja, 2008. "Government ownership of banks, institutions, and financial development," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 218-252, February.
    32. Iannotta, Giuliano & Nocera, Giacomo & Sironi, Andrea, 2007. "Ownership structure, risk and performance in the European banking industry," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2127-2149, July.
    33. Besanko, David & Thakor, Anjan V., 1992. "Banking deregulation: Allocational consequences of relaxing entry barriers," Journal of Banking & Finance, Elsevier, vol. 16(5), pages 909-932, September.
    34. Chung-Hua Shen & Iftekhar Hasan & Chih-Yung Lin, 2014. "The Government’s Role in Government-owned Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(3), pages 307-340, June.
    35. Peter M. DeMarzo, 1993. "Majority Voting and Corporate Control: The Rule of the Dominant Shareholder," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 713-734.
    36. George Pennacchi, 2019. "Banks, Taxes, and Nonbank Competition," Journal of Financial Services Research, Springer;Western Finance Association, vol. 55(1), pages 1-30, February.
    37. repec:bla:econom:v:57:y:1990:i:227:p:319-28 is not listed on IDEAS
    38. Cornett, Marcia Millon & Guo, Lin & Khaksari, Shahriar & Tehranian, Hassan, 2010. "The impact of state ownership on performance differences in privately-owned versus state-owned banks: An international comparison," Journal of Financial Intermediation, Elsevier, vol. 19(1), pages 74-94, January.
    39. Wolf Wagner, 2010. "Loan Market Competition and Bank Risk-Taking," Journal of Financial Services Research, Springer;Western Finance Association, vol. 37(1), pages 71-81, February.
    40. Chiappori, Pierre-Andre & Perez-Castrillo, David & Verdier, Thierry, 1995. "Spatial competition in the banking system: Localization, cross subsidies and the regulation of deposit rates," European Economic Review, Elsevier, vol. 39(5), pages 889-918, May.
    41. Franklin Allen & Elena Carletti, 2010. "An Overview of the Crisis: Causes, Consequences, and Solutions," International Review of Finance, International Review of Finance Ltd., vol. 10(1), pages 1-26, March.
    42. Bibhas Saha & Rudra Sensarma, 2013. "State ownership, credit risk and bank competition: a mixed oligopoly approach," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 6(1), pages 1-13, March.
    43. Arup Bose & Debashis Pal & David E. M. Sappington, 2014. "The impact of public ownership in the lending sector," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 47(4), pages 1282-1311, November.
    44. Dell'Ariccia, Giovanni & Marquez, Robert, 2006. "Competition among regulators and credit market integration," Journal of Financial Economics, Elsevier, vol. 79(2), pages 401-430, February.
    45. Bibhas Saha & Rudra Sensarma, 2004. "Divestment and Bank Competition," Journal of Economics, Springer, vol. 81(3), pages 223-247, March.
    46. Fries, Steven & Taci, Anita, 2005. "Cost efficiency of banks in transition: Evidence from 289 banks in 15 post-communist countries," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 55-81, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jing, Zhongbo & Liu, Wei & Wang, Zexi & Wei, Lu & Zhang, Xuan, 2024. "Does local government debt regulation improve rural banks’ performance? Evidence from China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ping-Lun Tseng & Wen-Chung Guo, 2022. "Fintech, Credit Market Competition, and Bank Asset Quality," Journal of Financial Services Research, Springer;Western Finance Association, vol. 61(3), pages 285-318, June.
    2. Guo, Wen-Chung & Tseng, Ping-Lun, 2023. "COVID-19, bank risk, and capital regulation: The aggregate shock and social distancing," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 155-173.
    3. Denis Davydov, 2018. "Does State Ownership of Banks Matter?," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(2), pages 250-285, August.
    4. Boubakri, Narjess & El Ghoul, Sadok & Guedhami, Omrane & Hossain, Mahmud, 2020. "Post-privatization state ownership and bank risk-taking: Cross-country evidence," Journal of Corporate Finance, Elsevier, vol. 64(C).
    5. Lin, Kun-Li & Doan, Anh Tuan & Doong, Shuh-Chyi, 2016. "Changes in ownership structure and bank efficiency in Asian developing countries: The role of financial freedom," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 19-34.
    6. Michal Jurek, 2014. "Role and impact of different types of financial institutions on economic performance and stability of the real sector in selected EU member states," Working papers wpaper36, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    7. Michiel Bijlsma & Andrei Dubovik, 2014. "Banks, Financial Markets and Growth in Developed Countries: a Survey of the empirical literature," CPB Discussion Paper 266, CPB Netherlands Bureau for Economic Policy Analysis.
    8. Michiel Bijlsma & Andrei Dubovik, 2014. "Banks, Financial Markets and Growth in Developed Countries: a Survey of the empirical literature," CPB Discussion Paper 266.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Mutarindwa, Samuel & Siraj, Ibrahim & Stephan, Andreas, 2021. "Ownership and bank efficiency in Africa: True fixed effects stochastic frontier analysis," Journal of Financial Stability, Elsevier, vol. 54(C).
    10. Janbaz, Mehdi & Hassan, M. Kabir & Floreani, Josanco & Dreassi, Alberto & Jiménez, Alfredo, 2022. "Political risk in banks: A review and agenda," Research in International Business and Finance, Elsevier, vol. 62(C).
    11. Olszak, Małgorzata & Pipień, Mateusz & Kowalska, Iwona & Roszkowska, Sylwia, 2014. "What drives heterogeneity of loan loss provisions’ procyclicality in the EU?," MPRA Paper 56834, University Library of Munich, Germany.
    12. Martynova, Natalya & Ratnovski, Lev & Vlahu, Razvan, 2020. "Bank profitability, leverage constraints, and risk-taking," Journal of Financial Intermediation, Elsevier, vol. 44(C).
    13. El Moussawi, Chawki & Mansour, Rana, 2022. "Competition, cost efficiency and stability of banks in the MENA region," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 143-170.
    14. Chen, Yi-Ling & Ting, Hsiu-I & Wang, Ming-Chun, 2021. "Government support and bank performance during the 2007–2008 financial crisis," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    15. Bertay, Ata Can & Demirgüç-Kunt, Asli & Huizinga, Harry, 2015. "Bank ownership and credit over the business cycle: Is lending by state banks less procyclical?," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 326-339.
    16. Butzbach Olivier & Rotondo Gennaro & Desiato Talita, 2020. "Can banks be owned?," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 10(1), pages 1-21, March.
    17. Florian Leon, 2015. "What do we know about the role of bank competition in Africa?," CERDI Working papers halshs-01164864, HAL.
    18. Nengqi Pan & Millicent Chang & Xiaofei Pan, 2024. "Career concerns and earnings management in government‐owned banks," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 475-506, March.
    19. Wu, Ji & Guo, Mengmeng & Chen, Minghua & Jeon, Bang Nam, 2019. "Market power and risk-taking of banks: Some semiparametric evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 41(C).
    20. Beck, Thorsten & De Jonghe, Olivier & Schepens, Glenn, 2013. "Bank competition and stability: Cross-country heterogeneity," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 218-244.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:irvfin:v:22:y:2022:i:4:p:688-724. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=1369-412X .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.