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.