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Competition and Bank Risk Taking in a Differntiated Oligopoly

Author

Listed:
  • Kaniska Dam
  • Martín Basurto

    (Division of Economics, CIDE)

Abstract

We re-examine the relationship between the degree of deposit market competition and bank risk taking in a model where banks compete in differentiated deposit services. When banks invest their deposits directly, as has already been established in the extant literature, an increased degree of competition, measured either by greater degree of substitutability or by greater number of banks, induces the banks to take more risk in equilibrium. When banks invest their deposits in loans, and their borrowers choose the level of risk, the risk of bank failure is independent of the degree of competition in the deposit market.

Suggested Citation

  • Kaniska Dam & Martín Basurto, 2015. "Competition and Bank Risk Taking in a Differntiated Oligopoly," Working Papers DTE 583, CIDE, División de Economía.
    • Handle: RePEc:emc:wpaper:dte583
    as

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    File URL: http://www.economiamexicana.cide.edu/RePEc/emc/pdf/DTE/DTE583.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
    3. 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.
    Full references (including those not matched with items on IDEAS)

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    Keywords

    Bank competition; risk taking; loan contracts.;
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