Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/98916
Authors: 
Arping, Stefan
Year of Publication: 
2014
Series/Report no.: 
Tinbergen Institute Discussion Paper 14-059/IV
Abstract: 
This article presents a model in which, contrary to conventional wisdom, competi- tion can make banks more reluctant to take excessive risks: As competition intensifies and margins decline, banks face more-binding threats of failure, to which they may respond by reducing their risk-taking. Yet, at the same time, banks become riskier. This is because the direct, destabilizing effect of lower margins outweighs the disciplining effect of competition; moreover, a substantial rise in competition reduces banksÂ’ incentive to build precautionary capital buffers. A key implication is that the effects of competition on risk-taking and on failure risk can move in opposite directions.
Subjects: 
Charter Value Hypothesis
Bank Franchise Value
Bank Competition
Financial Stability
Capital Requirements
JEL: 
G2
G3
Document Type: 
Working Paper

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