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Effect of the Equity Capital Ratio on the Relationship between Competition and Bank Risk-Taking Behavior
[Liquidity and leverage]

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Listed:
  • Jia Hao
  • Kuncheng Zheng

Abstract

We examine how the relationship between competition and risk-taking changes with the ex ante bank equity capital ratio. We show that competition in the banking market, on average, mitigates risk-taking by banks. This relationship, however, can be altered by a bank’s ex ante equity capital ratio. More specifically, when face with increased competition, banks with low ex ante equity capital ratios engage in relatively larger reductions in risk-taking. They do so primarily by decreasing the risk in their lending portfolios. In contrast, banks with high enough ex ante equity capital ratios might not reduce their risk-taking at all. (JEL G21, G32, O16, D40, G18)

Suggested Citation

  • Jia Hao & Kuncheng Zheng, 2021. "Effect of the Equity Capital Ratio on the Relationship between Competition and Bank Risk-Taking Behavior [Liquidity and leverage]," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 10(4), pages 813-855.
    • Handle: RePEc:oup:rcorpf:v:10:y:2021:i:4:p:813-855.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfab009
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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