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Competition and risk taking in banking: The charter value hypothesis revisited

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  • Arping, Stefan

Abstract

Conventional wisdom suggests that greater competition in banking, by eroding bank charter values, exacerbates banks’ incentives to take excessive risks. This paper presents a model in which, contrary to this view, competition can cause banks to act more prudently: As competition intensifies and profit margins decline, banks face more-binding threats of failure, to which they may respond by taking lower risks. Nonetheless, competition is unambiguously destabilizing in this model: The direct effect of lower margins on bank failure rates always outweighs the prudence effect. A key implication is that the effects of competition on bank risk taking and on failure risk can move in opposite directions.

Suggested Citation

  • Arping, Stefan, 2019. "Competition and risk taking in banking: The charter value hypothesis revisited," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    • Handle: RePEc:eee:jbfina:v:107:y:2019:i:c:4
    DOI: 10.1016/j.jbankfin.2019.105609
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    References listed on IDEAS

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    Cited by:

    1. Liang, Yunjia & Zhou, Bo & Zhao, Shaoyang, 2024. "Risking or de-risking? The effect of banking competition on large state-owned banks and small and medium-sized enterprise lending: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 94(C).
    2. Bate Adisu Fanta, 2022. "The Nexus between Uncertainty Avoidance Culture and Risk-taking Behaviour in Entrepreneurial Firms’ Decision Making," Journal of Intercultural Management, Sciendo, vol. 14(1), pages 104-132, March.
    3. Blanco-Oliver, Antonio, 2021. "Banking reforms and bank efficiency: Evidence for the collapse of Spanish savings banks," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 334-347.
    4. Douglas A. Adu, 2022. "Competition and bank risk-taking in Sub-Saharan Africa countries," SN Business & Economics, Springer, vol. 2(7), pages 1-26, July.
    5. Matabaro Borauzima, Luc & Muller, Aline, 2023. "Bank risk-taking and competition in developing banking markets: Does efficiency level matter? Evidence from Africa," Emerging Markets Review, Elsevier, vol. 55(C).
    6. Wang, Chaochao & Dong, Yan & Ge, Ran, 2023. "Bank branching deregulation and the credit risk of the regional banking sector: Evidence from city commercial banks in China," Emerging Markets Review, Elsevier, vol. 55(C).
    7. Jiang, Jiaoliang & Chen, Yulin, 2021. "How does labor protection influence corporate risk-taking? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    8. Maisam Ali & Christopher Gan & Muhammad Nadeem, 2023. "A CEO's expertise power and bank diversification," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(4), pages 3815-3840, December.
    9. Hossain, Shahadat & Galbreath, Jeremy & Hasan, Mostafa Monzur & Randøy, Trond, 2020. "Does competition enhance the double-bottom-line performance of microfinance institutions?," Journal of Banking & Finance, Elsevier, vol. 113(C).

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    More about this item

    Keywords

    Banking competition; Bank risk taking; Charter value hypothesis; Financial stability;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G01 - Financial Economics - - General - - - Financial Crises

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