Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/211822
Authors: 
Shy, Oz
Stenbacka, Rune
Year of Publication: 
1998
Series/Report no.: 
Bank of Finland Discussion Papers No. 22/1998
Abstract: 
This study demonstrates that the common view, whereby an increase in competition leads banks to increased risk taking, fails to hold in an environment where consumers can choose in which bank to make a deposit based on their knowledge of the riskiness incorporated in the banks' outstanding loan portfolios.We show that, in the absence of deposit insurance, competition between differentiated banks will increase the returns from diversification.We offer a welfare analysis establishing that introduction of competition into the banking industry can only improve social welfare.However, competition cannot always guarantee that diversification will occur to a socially optimal extent.Finally, we show that deposit insurance would eliminate the beneficial effects of banks competing with asset quality as a strategic instrument.
Subjects: 
Risk taking in banking
banks' portfolio diversification
bank competition
deposit insurance
Persistent Identifier of the first edition: 
ISBN: 
951-686-592-5
Document Type: 
Working Paper

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