Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, April 19, 2010

How Does Competition Impact Bank Risk-Taking?

Posted by D. Daniel Sokol

Gabriel Jiménez (Banco de España), Jose A. Lopez (Federal Reserve Bank Of San Francisco), and Jesús Saurina (Banco de España) ask How Does Competition Impact Bank Risk-Taking?

ABSTRACT: A common assumption in the academic literature is that franchise value plays a key role in limiting bank risk-taking. As market power is the primary source of franchise value, reduced competition in banking markets has been seen as promoting banking stability. We test this hypothesis using data for the Spanish banking system. We find that standard measures of market concentration do not affect bank risk-taking. However, we find a negative relationship between market power measured using Lerner indexes based on bank-specific interest rates and bank risk. Our results support the franchise value paradigm.

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