Berger, Allen N.Klapper, Leora F.Turk-Ariss, Rima2012-05-312012-05-312008-08https://hdl.handle.net/10986/6794Under the traditional "competition-fragility" view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative "competition-stability" view, more market power in the loan market may result in greater bank risk as the higher interest rates charged to loan customers make it more difficult to repay loans and exacerbate moral hazard and adverse selection problems. But even if market power in the loan market results in riskier loan portfolios, the overall risks of banks need not increase if banks protect their franchise values by increasing their equity capital or engaging in other risk-mitigating techniques. The authors test these theories by regressing measures of loan risk, bank risk, and bank equity capital on several measures of market power, as well as indicators of the business environment, using data for 8,235 banks in 23 developed nations. The results suggest that - consistent with the traditional "competition-fragility" view - banks with a greater degree of market power also have less overall risk exposure. The data also provide some support for one element of the "competition-stability" view - that market power increases loan portfolio risk. The authors show that this risk may be offset in part by higher equity capital ratios.CC BY 3.0 IGOACCESS TO CREDITALLOCATION OF CREDITASSET ALLOCATIONASSET RATIOSASSETS RATIOBALANCE SHEETBANK ASSETSBANK BEHAVIORBANK CAPITALIZATIONBANK CHARGESBANK COMPETITIONBANK CREDITBANK EQUITYBANK FAILURESBANK LOANBANK MARKETBANK PROFITABILITYBANK REGULATIONBANK RISKBANK SIZEBANKING INDUSTRYBANKING INSTITUTIONSBANKING MARKETBANKING MARKETSBANKING PRODUCTSBANKING SECTORBANKING SYSTEMBANKING SYSTEMSBANKRUPTCYBANKRUPTCY LAWSBANKRUPTCY RISKBANKSBARRIERS TO ENTRYBONDSBUSINESS LOANSBUSINESS SCHOOLCAPITAL BASECAPITAL REQUIREMENTSCAPITALIZATIONCHECKSCOLLATERALCOMMERCIAL LOANCOMMERCIAL LOAN MARKETCOMPETITIVENESSCREDIT ANALYSISCREDIT AVAILABILITYCREDIT DERIVATIVESCREDIT INFORMATIONCREDIT MARKETCREDITSDEPOSITDEPOSIT INSURANCEDEPOSITSDOMESTIC BANKSDUMMY VARIABLEECONOMIC DEVELOPMENTECONOMIC POLICYEQUITY CAPITALEXCHANGE RATESFEDERAL RESERVEFEDERAL RESERVE BANKFEDERAL RESERVE BANK OF NEW YORKFINANCIAL CRISESFINANCIAL DATAFINANCIAL FRAGILITYFINANCIAL INSTABILITYFINANCIAL INSTITUTIONSFINANCIAL LIBERALIZATIONFINANCIAL MARKETSFINANCIAL POLICYFINANCIAL STABILITYFINANCIAL SYSTEMFIXED CAPITALFOREIGN BANKFOREIGN BANKSGAMBLINGGOVERNMENT BANKSHOLDINGINCOMEINFORMAL ECONOMYINPUT PRICESINSURANCEINTANGIBLEINTEREST RATEINTEREST RATE RISKINTEREST RATESINTERNATIONAL BANKINVESTOR PROTECTIONLARGE BANKSLEGAL RIGHTSLEGAL SYSTEMSLOANLOAN APPLICANTSLOAN CONTRACTLOAN CUSTOMERSLOAN MARKETLOAN MARKETSLOAN PORTFOLIOLOAN PORTFOLIO QUALITYLOAN PORTFOLIOSLOAN RATESMARKET COMPETITIONMARKET CONCENTRATIONMARKET POWERMARKET STRUCTUREMARKET VALUEMONETARY FUNDMONOPOLYMORAL HAZARDMULTINATIONALSNONPERFORMING LOANSOPPORTUNITY COSTSPERSONNEL EXPENSESPORTFOLIO RISKPRIVATE CREDITPROBABILITYPROBABILITY OF DEFAULTPROFIT MARGINSPROFITABILITYPRUDENTIAL REGULATIONPUBLIC ECONOMICSPUBLIC REGISTRYREAL ESTATERENTSRETAILRETAINED EARNINGSRETURNRETURN ON ASSETSRETURNSRISK EXPOSURERISK EXPOSURESRISK MANAGEMENTRISK OF BANK FAILURERISK TAKINGSAFETY NETSALESSALES OF LOANSSAVINGSSECURITIESSMALL BUSINESSSMALL BUSINESS LOANSSUBSIDIARIESTAXVOLATILITYWorld Bank10.1596/1813-9450-4696