Antitrust & Competition Policy Blog

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

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Thursday, January 5, 2012

The Relationship Between Banking Market Competition and Risk-taking: Do Size and Capitalization Matter?

Posted by D. Daniel Sokol

Benjamin M. Tabak (Banco Central do Brasil and Departament of Economics, Universidade Catolica de Brasilia), Dimas M. Fazioy (Departament of Economics, Universidade de Brasilia) and Daniel O. Cajueiro (Departament of Economics, Universidade de Brasilia) ask The Relationship Between Banking Market Competition and Risk-taking: Do Size and Capitalization Matter?

ABSTRACT: This paper aims to study the effect of banking competition on Latin American banks' risk-taking and whether capitalization and size changes this relationship. We conclude that: (1) competition affects risk in a non-linear manner: high/low (average) competition are related to more (less) stability; (2) bank's size explains the advantage from competition, while capitalization is only positive for larger banks in this case; (3) capital ratio explains the advantage from lower competition. These results are of uttermost importance for bank regulation, especially due to the recent turmoil in worldwide financial markets.

http://lawprofessors.typepad.com/antitrustprof_blog/2012/01/the-relationship-between-banking-market-competition-and-risk-taking-do-size-and-capitalization-matte.html

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