Through an extensive analysis of theoretical and empirical literature on competition and risk in banking, this document forms the hypothesis that competition and risk are positively correlated. Several factors are discussed that support this hypothesis, including financial liberalization increasing competition and leading banks to take on riskier activities to maintain profits. Deregulation and consolidation in the banking sector are also argued to increase competition and incentivize greater risk-taking by banks. While various perspectives on the relationship between competition and risk are considered, the paper concludes that most evidence favors the view that higher competition induces higher risk in the banking industry.
Complex Contracting in the Public SectorJon Hansen
This paper was was written by Trevor Brown (John Glenn School of Public Affairs, The Ohio State University), Matthew Potoski (Department of Political Science, Iowa State University), and David Van Slyke (Maxwell School of Citizenship and Public Affairs, Syracuse University) for the Kettering Symposium on Public Accountability, May 22 - 24, 2008.
It is an interestingly insightful and useful paper that has be used as a reference point for the February 4th, 2010 Contacting Intelligence Post: Complex contracting in the public sector: Managing relations and negotiating contracts in the absence of market discipline (http://wp.me/pYOvn-7u)
Yes Virginia! A Profile In Excellence White PaperJon Hansen
Who Can Benefit from this Paper?
This thought provoking white paper is an essential resource tool for public sector organizations that are already in the midst of an established program, or ones who are contemplating a change. Although they do not operate within the same framework of a public or government entity, private sector companies can also gain important insight as the paper’s principles are universal in their applicability.
Utilizing an advanced research methodology, the primary objective of this paper is to provide policy-makers (and those affected by government policy) with a multi-dimensional “objective lens” through which they will be able to view the veracity of both existing as well as contemplated initiatives. The resulting insights will empower program champions to take the necessary steps to deliver tangible and sustainable results.
This paper examines the role of loan characteristics in mortgage default probability for different mortgage lenders in the UK. The accuracy of default prediction is tested with two statistical methods, a probit model and linear discriminant analysis, using a unique dataset of defaulted commercial loan portfolios provided by sixty-six financial institutions. Both models establish that the attributes of the underlying real estate asset and the lender are significant factors in determining default probability for commercial mortgages. In addition to traditional risk factors such as loan-to-value and debt servicing coverage ratio lenders and regulators should consider loan characteristics to assess more accurately probabilities of default.
In Grossman and Helpman’s (1994) canonical "Protection for Sale" (PFS) model political competition between industry lobbies is purely driven by their interests as consumers. This paper introduces demand linkages and oligopolistic competition into PFS framework to address the rivalry among lobbies due to product substitutability. It shows that increased substitutability weakens the interest groups’ incentives to lobby and reduces tariff distortions. This may explain why empirical tests of PFS find surprisingly little impact of lobbies on the government trade policy decision. The paper also analyzes endogenous lobby formation, suggesting that demand linkages may adversely affect industry decision to get organized.
by Elena Paltseva, forthcoming in Canadian Journal of Economics
Many quality dimensions are hard to contract upon and are at risk of degradation when services are procured rather than produced in-house. However, procurement may foster performance-improving innovation. We assemble a large data set on elderly care services in Sweden between 1990 and 2009, including survival rates - our measure of non-contractible quality - and subjectively perceived quality of service. We estimate how procurement from private providers affects these measures using a difference-in-difference approach. The results indicate that procurement significantly increases non-contractible quality as measured by survival rate, reduces the cost per resident but does not affect subjectively perceived quality.
This paper reports results from an experiment studying how fines, leniency programs and reward schemes for whistleblowers affect cartel formation and prices. Antitrust without leniency reduces cartel formation, but increases cartel prices: subjects use costly fines as (altruistic) punishments. Leniency further increases deterrence, but stabilizes surviving cartels: subjects appear to anticipate harsher times after defections as leniency reduces recidivism and lowers post-conviction prices. With rewards, cartels are reported systematically and prices finally fall. If a ringleader is excluded from leniency, deterrence is unaffected but prices grow. Differences between treatments in Stockholm and Rome suggest culture may affect optimal law enforcement.
The EU Leniency Programme (LP) aims to encourage the dissolution of existing cartels and the deterrence of future cartels, through spontaneous reporting and/or significant cooperation by cartel members during an investigation. However, the European Commission guidelines are rather vague in terms of the factors that influence the granting and scale of fine reductions. As expected, the results shown that the first reporting or cooperating firm receives generous fine reductions. More importantly, there is some evidence that firms can “learn how to play the leniency game”, either learning how to cheat or how to report, as the reductions given to multiple oenders (and their cartel partners) are substantially higher. These results have an ambiguous impact on firms’ incentives and major implications for policy making.
By Catarina Marvao, SITE Working Paper.
Complex Contracting in the Public SectorJon Hansen
This paper was was written by Trevor Brown (John Glenn School of Public Affairs, The Ohio State University), Matthew Potoski (Department of Political Science, Iowa State University), and David Van Slyke (Maxwell School of Citizenship and Public Affairs, Syracuse University) for the Kettering Symposium on Public Accountability, May 22 - 24, 2008.
It is an interestingly insightful and useful paper that has be used as a reference point for the February 4th, 2010 Contacting Intelligence Post: Complex contracting in the public sector: Managing relations and negotiating contracts in the absence of market discipline (http://wp.me/pYOvn-7u)
Yes Virginia! A Profile In Excellence White PaperJon Hansen
Who Can Benefit from this Paper?
This thought provoking white paper is an essential resource tool for public sector organizations that are already in the midst of an established program, or ones who are contemplating a change. Although they do not operate within the same framework of a public or government entity, private sector companies can also gain important insight as the paper’s principles are universal in their applicability.
Utilizing an advanced research methodology, the primary objective of this paper is to provide policy-makers (and those affected by government policy) with a multi-dimensional “objective lens” through which they will be able to view the veracity of both existing as well as contemplated initiatives. The resulting insights will empower program champions to take the necessary steps to deliver tangible and sustainable results.
This paper examines the role of loan characteristics in mortgage default probability for different mortgage lenders in the UK. The accuracy of default prediction is tested with two statistical methods, a probit model and linear discriminant analysis, using a unique dataset of defaulted commercial loan portfolios provided by sixty-six financial institutions. Both models establish that the attributes of the underlying real estate asset and the lender are significant factors in determining default probability for commercial mortgages. In addition to traditional risk factors such as loan-to-value and debt servicing coverage ratio lenders and regulators should consider loan characteristics to assess more accurately probabilities of default.
In Grossman and Helpman’s (1994) canonical "Protection for Sale" (PFS) model political competition between industry lobbies is purely driven by their interests as consumers. This paper introduces demand linkages and oligopolistic competition into PFS framework to address the rivalry among lobbies due to product substitutability. It shows that increased substitutability weakens the interest groups’ incentives to lobby and reduces tariff distortions. This may explain why empirical tests of PFS find surprisingly little impact of lobbies on the government trade policy decision. The paper also analyzes endogenous lobby formation, suggesting that demand linkages may adversely affect industry decision to get organized.
by Elena Paltseva, forthcoming in Canadian Journal of Economics
Many quality dimensions are hard to contract upon and are at risk of degradation when services are procured rather than produced in-house. However, procurement may foster performance-improving innovation. We assemble a large data set on elderly care services in Sweden between 1990 and 2009, including survival rates - our measure of non-contractible quality - and subjectively perceived quality of service. We estimate how procurement from private providers affects these measures using a difference-in-difference approach. The results indicate that procurement significantly increases non-contractible quality as measured by survival rate, reduces the cost per resident but does not affect subjectively perceived quality.
This paper reports results from an experiment studying how fines, leniency programs and reward schemes for whistleblowers affect cartel formation and prices. Antitrust without leniency reduces cartel formation, but increases cartel prices: subjects use costly fines as (altruistic) punishments. Leniency further increases deterrence, but stabilizes surviving cartels: subjects appear to anticipate harsher times after defections as leniency reduces recidivism and lowers post-conviction prices. With rewards, cartels are reported systematically and prices finally fall. If a ringleader is excluded from leniency, deterrence is unaffected but prices grow. Differences between treatments in Stockholm and Rome suggest culture may affect optimal law enforcement.
The EU Leniency Programme (LP) aims to encourage the dissolution of existing cartels and the deterrence of future cartels, through spontaneous reporting and/or significant cooperation by cartel members during an investigation. However, the European Commission guidelines are rather vague in terms of the factors that influence the granting and scale of fine reductions. As expected, the results shown that the first reporting or cooperating firm receives generous fine reductions. More importantly, there is some evidence that firms can “learn how to play the leniency game”, either learning how to cheat or how to report, as the reductions given to multiple oenders (and their cartel partners) are substantially higher. These results have an ambiguous impact on firms’ incentives and major implications for policy making.
By Catarina Marvao, SITE Working Paper.
June 2010 Ethical Corporation intelligence briefing on how banks can and should use ethics, sustainability and corporate responsibility to rebuild trust in their brands and in finance generally
Many commodities (including energy, agricultural products and metals) are sold both on spot markets and through long-term contracts which commit the parties to exchange the commodity in each of a number of spot market periods. This paper shows how the length of contracts affects the possibility of collusion in a repeated price-setting game. Contracts can both help and hinder collusion, because reducing the size of the spot market cuts both the immediate gain from defection and the punishment for deviation. Firms can always sustain some collusive price above marginal cost if they sell the right number of contracts, of any duration, whatever their discount factor. As the duration of contracts increases, however, collusion becomes harder to sustain.
Version of October 2007. Please check for updates http://www.sciencedirect.com/
Read more research publications at: https://www.hhs.se/site
We investigate the impact of procurement thresholds on strategic behavior of public buyers in Sweden. We document signs of “bunching” at the threshold, which suggests that strategic behavior in procurement is potentially important in Sweden, and should not be overlooked in the on-going public debate on the procurement thresholds. At the same time, data limitations do not allow us to access the impact of this strategic behavior on procurement outcomes and efficiency. This calls for better and more extensive procurement data collection.
Based on my recent work with several co-authors this paper explores the relationship between discretion, reputation, competition and entry in procurement markets. I focus especially on public procurement, which is highly regulated for accountability and trade reasons. In Europe regulation constrains the use of past performance information to select contractors while in the US its use is encouraged. I present some novel evidence on the benefits of allowing buyers to use reputational indicators based on past performance and discuss the complementary roles of discretion and restricted competition in reinforcing relational/reputational forces, both in theory and in a new
empirical study on the effects restricted rather than open auctions. I conclude reporting preliminary results form a laboratory experiment showing that reputational mechanisms can be designed to stimulate rather than hindering new entry.
Leniency policies and asymmetric punishment are regarded as potentially powerful anticorruption
tools, also in the light of their success in busting price-fixing cartels. It has been
argued, however, that the introduction of these policies in China in 1997 has not helped
fighting corruption. Following up on this view, the Central Committee of the Chinese Communist
Party passed, in November 2015, a reform introducing heavier penalties, but also
restrictions to leniency. Properly designing and correctly evaluating these policies is difficult.
Corruption is only observed if detected, and an increase in convictions is consistent
with both reduced deterrence or improved detection. We map the evolution of the Chinese
anti-corruption legislation, collect data on corruption cases for the period 1986-2010, and
apply a new method to identify deterrence effects from changes in detected cases developed
for cartels by Miller (2009). We document a large and stable fall in corruption cases
starting immediately after the 1997 reform, consistent with a negative effect of the reform
on corruption detection, but under specific assumptions also with increased deterrence. To
resolve this ambiguity, we collect and analyze a random sample of case files from corruption
trials. Results point to a negative effect of the 1997 reform, linked to the increased leniency
also for bribe-takers cooperating after being denounced. This likely enhanced their ability
to retaliate against reporting bribe-givers – chilling detection through whistleblowing – as
predicted by theories on how these programs should (not) be designed.
This paper estimates the impact of competition policy on total factor productivity growth for 22 industries in twelve OECD countries over 1995 to 2005. We find a positive and significant effect of competition policy as measured by created indexes. We provide results based on instrumental variables estimators and heterogeneous effects to support the causal nature of the established link. The effect is particularly strong for specific aspects of competition policy related to its institutional setup and antitrust activities. It is also strengthened by good legal systems, suggesting complementarities between competition policy and the efficiency of law enforcement institutions.
Since coming into office two years ago, Chinese President Xi Jinping has carried out a sweeping, highly publicized anticorruption campaign. Skeptics are debating whether the campaign is biased towards Mr. Xi’s rivals, and even possibly related to the current economic slowdown. What is less debated is the next stage of Mr. Xi’s anti-corruption strategy, which is going to alter the legal statutes. Amendment IX, proposed in October 2014, includes heavier penalties, but two important tools in the fight of corruption – one-sided leniency and asymmetric punishment – became more limited and discretional. We argue that studying a 1997 reform and its effects can shed some light onto why the Chinese leadership seems dissatisfied with the current legislation and the likely effects of the proposed changes.
This paper reports results from a laboratory experiment exploring the relationship between reputation and entry in procurement. There is widespread concern among regulators that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new (smaller or foreign) firms in public procurement markets. Our results suggest that while some reputational mechanisms indeed reduce the frequency of entry, so that the concern is warranted, appropriately designed reputation mechanisms actually stimulate entry. Since quality increases but not prices, our data also suggest that the introduction of reputation may generate large welfare gains from the buyer.
Discussion of strategies for increasing profits without focusing on expense reduction but instead on areas with leverage like claims. Specific examples for gaining an edge are discussed.
La demencia es la pérdida o debilitamiento de las facultades mentales, generalmente grave y progresivo, debido a la edad o a una enfermedad, que se caracteriza por alteraciones de la memoria y la razón y trastornos en la conducta.
En esta presentación se muestran algunos aspectos sobre esta enfermedad mas a fondo y diversas características sobre ella.
June 2010 Ethical Corporation intelligence briefing on how banks can and should use ethics, sustainability and corporate responsibility to rebuild trust in their brands and in finance generally
Many commodities (including energy, agricultural products and metals) are sold both on spot markets and through long-term contracts which commit the parties to exchange the commodity in each of a number of spot market periods. This paper shows how the length of contracts affects the possibility of collusion in a repeated price-setting game. Contracts can both help and hinder collusion, because reducing the size of the spot market cuts both the immediate gain from defection and the punishment for deviation. Firms can always sustain some collusive price above marginal cost if they sell the right number of contracts, of any duration, whatever their discount factor. As the duration of contracts increases, however, collusion becomes harder to sustain.
Version of October 2007. Please check for updates http://www.sciencedirect.com/
Read more research publications at: https://www.hhs.se/site
We investigate the impact of procurement thresholds on strategic behavior of public buyers in Sweden. We document signs of “bunching” at the threshold, which suggests that strategic behavior in procurement is potentially important in Sweden, and should not be overlooked in the on-going public debate on the procurement thresholds. At the same time, data limitations do not allow us to access the impact of this strategic behavior on procurement outcomes and efficiency. This calls for better and more extensive procurement data collection.
Based on my recent work with several co-authors this paper explores the relationship between discretion, reputation, competition and entry in procurement markets. I focus especially on public procurement, which is highly regulated for accountability and trade reasons. In Europe regulation constrains the use of past performance information to select contractors while in the US its use is encouraged. I present some novel evidence on the benefits of allowing buyers to use reputational indicators based on past performance and discuss the complementary roles of discretion and restricted competition in reinforcing relational/reputational forces, both in theory and in a new
empirical study on the effects restricted rather than open auctions. I conclude reporting preliminary results form a laboratory experiment showing that reputational mechanisms can be designed to stimulate rather than hindering new entry.
Leniency policies and asymmetric punishment are regarded as potentially powerful anticorruption
tools, also in the light of their success in busting price-fixing cartels. It has been
argued, however, that the introduction of these policies in China in 1997 has not helped
fighting corruption. Following up on this view, the Central Committee of the Chinese Communist
Party passed, in November 2015, a reform introducing heavier penalties, but also
restrictions to leniency. Properly designing and correctly evaluating these policies is difficult.
Corruption is only observed if detected, and an increase in convictions is consistent
with both reduced deterrence or improved detection. We map the evolution of the Chinese
anti-corruption legislation, collect data on corruption cases for the period 1986-2010, and
apply a new method to identify deterrence effects from changes in detected cases developed
for cartels by Miller (2009). We document a large and stable fall in corruption cases
starting immediately after the 1997 reform, consistent with a negative effect of the reform
on corruption detection, but under specific assumptions also with increased deterrence. To
resolve this ambiguity, we collect and analyze a random sample of case files from corruption
trials. Results point to a negative effect of the 1997 reform, linked to the increased leniency
also for bribe-takers cooperating after being denounced. This likely enhanced their ability
to retaliate against reporting bribe-givers – chilling detection through whistleblowing – as
predicted by theories on how these programs should (not) be designed.
This paper estimates the impact of competition policy on total factor productivity growth for 22 industries in twelve OECD countries over 1995 to 2005. We find a positive and significant effect of competition policy as measured by created indexes. We provide results based on instrumental variables estimators and heterogeneous effects to support the causal nature of the established link. The effect is particularly strong for specific aspects of competition policy related to its institutional setup and antitrust activities. It is also strengthened by good legal systems, suggesting complementarities between competition policy and the efficiency of law enforcement institutions.
Since coming into office two years ago, Chinese President Xi Jinping has carried out a sweeping, highly publicized anticorruption campaign. Skeptics are debating whether the campaign is biased towards Mr. Xi’s rivals, and even possibly related to the current economic slowdown. What is less debated is the next stage of Mr. Xi’s anti-corruption strategy, which is going to alter the legal statutes. Amendment IX, proposed in October 2014, includes heavier penalties, but two important tools in the fight of corruption – one-sided leniency and asymmetric punishment – became more limited and discretional. We argue that studying a 1997 reform and its effects can shed some light onto why the Chinese leadership seems dissatisfied with the current legislation and the likely effects of the proposed changes.
This paper reports results from a laboratory experiment exploring the relationship between reputation and entry in procurement. There is widespread concern among regulators that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new (smaller or foreign) firms in public procurement markets. Our results suggest that while some reputational mechanisms indeed reduce the frequency of entry, so that the concern is warranted, appropriately designed reputation mechanisms actually stimulate entry. Since quality increases but not prices, our data also suggest that the introduction of reputation may generate large welfare gains from the buyer.
Discussion of strategies for increasing profits without focusing on expense reduction but instead on areas with leverage like claims. Specific examples for gaining an edge are discussed.
La demencia es la pérdida o debilitamiento de las facultades mentales, generalmente grave y progresivo, debido a la edad o a una enfermedad, que se caracteriza por alteraciones de la memoria y la razón y trastornos en la conducta.
En esta presentación se muestran algunos aspectos sobre esta enfermedad mas a fondo y diversas características sobre ella.
A plant in the northern German town of Stade makes vertical tail planes for the Airbus fleet. Its production processes are breaking new ground - and setting an example for the European aircraft market.
NÃO E OBRIGADO TRAZER 3 DIRETOS O SISTEMA E MATRIZ FORÇADA MAIS SE TROUXE VEJA O QUE VC PODE GANHAR:
Funciona assim.
Vc entra no projeto com apenas R$ 30,00
Uma unica vez
Vc recebe R$ 10,00 de recarga
R$ 4,00 fica para manutençao do app
R$ 16,00 e dividido na rede
Em 3 niveis
1nivel 3 PESSOAS R$1,00
2nivel 9 PESSOAS R$3,00
3nivel 27 PESSOAS R$ 12,00
Total R$ 354,00
O sistema debita automatico
R$ 200,00 desse saldo e faz UPGRADE para proxima faze
Daqui pra frente fica assim
Desses R$ 200,00
Vc recebe R$ 20,00 de recarga
R$ 20,00 fica para o APP
R$ 160,00 dividido para a rede
1nivel 3 PESSOAS R$10,00
2nivel 9 PESSOAS R$ 20,00
3nivel 27 PESSOAS R$ 130,00
Total dos ganhos R$ 4.074,00
The literature shows little evidence on the effects of the business model upon the volatility of banks in developing and fast growing economies. Hence, this study examines the effects of busi-ness model choice on bank’s stability in ASEAN countries. Using GMM and other robust econo-metric methods on the sample of 99 joint stock commercial banks, we find significant and nega-tive impacts of diversification model in which bank shifts toward non – interest and fee – based activities. We also find that the impacts are different between two groups of countries. For Vi-etnam, Indonesia and the Philippines, the diversification entails negative impacts on the stability while demonstrating positive impacts for Thailand and Malaysia. Upon the findings, we draw policy implications for a more sustainable development in ASEAN banking business.
International Journal of Business and Management Invention (IJBMI)inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online
International Journal of Business and Management Invention (IJBMI)inventionjournals
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
In an increasingly global and interconnected economy, determining risk profiles is very critical. Read our whitepaper on the latest in network analysis theories to analyze systemic risk profiles not only in finance, but in any industry where there is a strong reliance on a network of people and goods.
Banking sector concentration, competition, and financial stability: The case ...Eesti Pank
Yannick Lucotte
PSB Paris School of Business, France
(with Juan Carlos Cuestas & Nicolas Reigl, Bank of Estonia)
Open seminar, EestiPank
Tallinn, June 19, 2017
Reply to DiscussionsD1 navyaA bank failure is the ending of.docxchris293
Reply to Discussions
D1: navya
A bank failure is the ending of an insolvent bank by a state or federal regulator. So the only power that closes the national banks is the comptroller who has a higher power in maintaining the currency. It mainly happens when a bank fails where it is assumed by the federal deposit insurance corporation in the insures of deposits. They find a different bank to take it over because various customers will specifically like the continuation using their debit cards, online banking tools, and accounts. So bank failures are mainly often to predict because the federal deposit insurance commission will not announce a particular bank to set go under the profits. Then bank diversification is the procedure that allocates the capital in a specific way because it reduces the exposure to a particular asset or risk. Therefore, the main reason for this bank diversification is to decrease the volatility or risk by investing in various assets (Goetz, 2012).
So considering both of those banking systems can easily relate to the country's economic health by determining the better quality of the loan book of different individual books. Then for maintaining the better quality of advance bank portfolio, there is only one crucial tool where it is credit monitoring. Credit monitoring plays a vital role in protecting the bank's exposures, but it also ensures the various funds that are channeled by maintaining the right purpose. It mainly acts as the guardrail for ensuring the health of banks and countries economically to stay in the right trajectory. Then various technology solutions will be readily available in the market for helping the automated process of credit monitoring to a large extent. They can ensure the functions of credit monitoring to keep the process and objective in the method oriented (Brownbridge, 2002).
References
Brownbridge, M. (2002). Resolving Bank Failures in Uganda: Policy Lessons from Recent Bank Failures. Development Policy Review, 20(3), 279-291. doi: 10.1111/1467-7679.00171
Goetz, M. (2012). Bank Diversification, Market Structure and Bank Risk Taking: Theory and Evidence from U.S. Commercial Banks. SSRN Electronic Journal. doi: 10.2139/ssrn.2651161
Reply:
D2: pavani
Diversification helps individual institutions and makes them be benefited. But Wagner says that the systematic risk increases by the degree of diversification. Raffestin also said something about the diversification that diversification can cause risks and any number of failures also. By the above words, we can know the negative aspects or negative effects of diversification. Systematic risks are very broad and complex term. This diversification process has some of the diversification measures. The indicator of diversification is calculated from the bank’s profitability. There are various methods of diversification. Commonly Alas et al proposed method is used (Mirzaei & Kutan, 2016).
And also the weight average diversification of banks ( AWDI.
Reply to DiscussionsD1 navyaA bank failure is the ending of.docx
Banking and Money Essay
1. Competition and Risk in Banking
Introduction
The relationship between Competition and Risk in Banking continues to generate debate,
which is indicative of the complexity and varying competing perspectives that surrounds this
subject. The traditional perspective states that when competition increases, bank incentives to
take on more risk increase (Keeley, 1990; Matutes and Vivs, 1996; Hellmann, et al., 2000).
Contrastingly, recent literature has argued that an increase in bank competition would lead to
a decline in the lending rate’s borrowers face. This will result in an increase in profit, thus
lowering a banks incentive to take on risk (Boyd and De Nicolo, 2005). Moreover, Martínez-
Miera and Repullo (2007) adopts both perspectives by suggesting a non-linear relationship
between the two variables. Competition and risk in banking detracts from the traditional
views that competition is healthy, thus this makes the topic and variables of more interest to
study. Competition not only initiates risk-taking behavior in banking, but also impacts
consumers and business’s. In essence, whether it be positive or negative, competition and risk
contributes towards a domino effect within the banking industry and society. This enabled us
to devise a hypothesis as to the relationship between the two variables.
This literature differentiates itself from others as it is modernistic, and requires an analysis of
competing perspectives (Literature) and events (past and present), which in turn will enable
us to consider all relevant information and conclude, as to whether the two variables withhold
a relationship. Moreover, it requires a comprehensive understanding of the topic, which is
used as a vehicle to communicate our hypothesis. Thus, in order to conduct our analysis, we
will use various sources of information and theorists to determine whether variable one
(Competition) affects variable two (Risk).
Literature Review
The potential correlation and effects of competition in the banking sector on banks’ risk-
taking is extremely widespread. In addition, it is very clear that the theoretical underpinnings
surrounding the subject are somewhat contradictory. The traditional view holds that
competition will have a risk-increasing consequence. Contrastingly, recent literature proposes
that risk-taking declines in response to increased competition. Furthermore, modern
literatures have also implied any effects as being non-monotonic. In relation to the traditional
view, the belief is that in banking systems where entry barriers are high and competition is
low, incumbent banks have more market power. This allows them to obtain monopoly rents
from the valuable chartered banks. This results in them being less likely adopt risk-shifting
motivations, as future rents may be in jeopardy as a result of increased default risk. High
competition lowers profits, and thus charter values, consequently making risk-shifting more
appealing.
It’s prominent that a big percentage of this section of the literature links the risk-shifting
enticements of deposit insurance to the risk outcomes of competition. Contributions made by
Keeley (1990), Matutes and Vives (1996) and Allen and Gale (2004) all display supporting
cases; being that the moral-hazardous outcome of deposit-insurance is neutralized by low
competition. Moreover, the consequential risk of competition originates from providing free
2. play to these effects of moral hazard. Comparably, Boyd and De Nicolo (2005) argued that
when deposit insurance is priced fairly, the link between risk and competition is broken
down. Moreover, the disclosing of bank risk by depositors may have a comparable impact as
eradicating (or accurately pricing) deposit insurance (Cordella and Yeyati, 2002).
A comparable line of logic, as the charter-value hypothesis supports the debate that banking
systems that are both less competitive and highly concentrated are less prone to systematic
banking crisis. This is because the increased profits that higher market power and limited
competition imply provides a cushion against adverse shocks, thus seeing a reduction in
systematic risk (Matutes and Vives, 2000). Whilst additional mechanisms have been
proposed, a significant connotation of the competition-fragility view states that banks should
have high valuations and profits. Moreover, any effects that high competition has on risk will
be displayed through relative valuation and profit margins.
The fundamental driver is therefore the mechanism that risk-taking increases when profits
decline. For this mechanism to occur, the assumption that banks control the risk-level of their
portfolio of assets is crucial. Boyd and De Nicolo (2005) believe that the ‘traditional view’ is
mainly the result of placing focus on deposit-market competition and treating bank-assets on
the balance sheet as a portfolio drawback with distributions that have been given
exogenously. Boyd and De Nicolo (2005) advocated an ‘optimal-contracting approach’ in
replace of the contracting approach. This permits competition both in the deposit and loan
market. The setting was one where banks lend to entrepreneurs who then finance risky
projects. The incentives for entrepreneurs to take on risk increases when profitability
declines. However, high loan market competition results in lower lending rates which
decreases entrepreneurs’ risk-taking incentives due higher profits. Moreover, the level of risk
for bank asset portfolios risk will decrease. Whilst the positive impact that deposit market
competition imposes on bank risk remains, the adverse effects of loan-market rivalry
dominate.
Evidence supporting the argument that competition negatively impacts risk may be derived
from the literature composed by Perotti and Suarez (2002). Through conducting an analysis
upon how dynamic settings with endogenized market-concentration provide an incentive for
bank speculative lending; they found that bank incentives to lend prudently increase when
competitors adopt more risk. This outcome derives from the expectation that market
concentration will increase due to the enhanced probability of competitors failing.
Consequently, the surviving banks may see themselves obtaining higher rents in the future.
Conversely, they also propose speculative lending may be enhanced by increased current
market concentration. The mechanism is that the expectancies of a low market concentration
in the future may provide banks with an incentive to amplify the advantages of a temporary
increased share in the market through the short-term rewards of lending speculatively.
In addition, another interpretation states that in banking structures where concentration is
high, with a low quantity of banks that are moderately big and systematically important,
implicit assurances connected with ‘too-big-to-fail’ procedures are more prone. This
encourages banks to form the expectation that they will be bailed out upon default, thus
inducing them to obtain higher risks (Boyd and Runkle, 1993; Mishkin 1999). This therefore
supports the argument that banks should be riskier when situated in markets with low
competition.
3. Thus, literature forecasts that competition has either a positive or negative impact on bank
risk-taking. Further adding to the pre-existing complications surrounding the topic, many
recent contributions suggest the existence of a non-monotonic effect. Through operating the
same system setup as Boyd and De Nicolo (2005), Martinez-Miera and Repullo (2008)
studied loan-market competition in isolation and stated that the outcomes of the latter
significantly center on the belief of loan defaults that are perfectly correlated, and dropping
this statement, displays results that suggest that the relationship between bank risk and
competition is U-shaped. Similarly, several contributions have implicitly and explicitly
displayed the existence of a non-monotonic effects. It has been suggested that the outcomes
of competition depend upon current and competition expected in the future (Perotti and
Suarez, 2002). More commonly, it could be debated that the charter value hypothesis relies
not only on the existence of deposit-insurance-induced moral hazard, but also on the
existence of non-trivial charter values (Forssbaeck and Shehzad, 2011). However,
competition in banking sector is moderately intensive already, the charter value hypothesis
displays very little about the potential outcomes of competition increasing further.
The academic ambiguity with respect to the impacts that competition has on bank risk-taking
is reflected by empirical evidence. The provision of evidence on US data (Keeley, 1990)
normally by relative valuations on proxy competition, reflects the belief that in less
competitive markets, banks should be valued more highly, and discover some indications of
risk and competition being positively associated.
More current results from international and US data are more diverse. For example, tests
conducted by De Nicolo et al. (2004) have suggested that the association between bank risk-
taking and concentration to be positive. This statement therefore contradicts the traditional
hypothesis that enhanced market power should link with decreased risk.
Comparably, using a US dataset and an international set of data of emerging countries, Boyd
et al. (2009) tested how default risk was effected by banking sector concentration (measured
by Herfindahl-Hirschman Index). The results contradict and refute the view of competition-
instability being that the expected impact of concentration on risk is positive. Whilst also
using proxies of competition at country level, but evaluating the impacts of financial stability,
the results found by Beck et al. (2006) are contradictory. They found that on one hand,
elevated market concentration is connected with decreased probability of a systematic crisis.
However, on the other hand, greater (regulatory) barriers of entrance to banking segment
enhance this possibility.
In addition, it has been suggested that the relationship between competition and bank-risk
taking is non-monotonic, but whether the negative or positive impact is dominant relies upon
the risk proxies adopted (Berger et al., 2009). For example, the impacts on default risk are
mainly positive, whereas asset risk is negatively effected by enhanced competition.
Overall it is clear that the results stemming from empirical literature oppose each other. Bank
risk (asset and default) may either increase or decrease when competition is enhanced.
However, the extent to which competition impacts risk is dependent on the context of the
situation. For example, variables such as the the level of development within a country, or the
state of the financial sector may impact the extent to which the two variables are correlated.
Moreover, based on our extensive analysis of literature surrounding the topic, this has lead to
the formation of the hypothesis that; competition in the banking sector is positively
associated with risk.
4. Input
Through conducting an in depth analysis of both theoretical and empirical literatures
surrounding the topic, it is evident that past theorists have contradicting views. However, it
has become apparent that the wide extent of philosophies and evidence in favour of
competition and risk positively affecting one another is sufficiently competent. The following
section of this essay will provide an in-depth analysis and will aid in supporting the
hypothesis that the two variables are positively correlated.
One way in which the positive association between competition and risk can be displayed is
through the event financial liberalization. This is when restrictions on financial markets are
eliminated, or when financial innovations such as subprime loans are introduced to the
market. Research conducted by Demirguc-Kunt and Detragiache (1998) has suggested that a
banking crises has a greater chance of occurring in liberalized financial systems. In addition,
it has been argued that the outcomes of financial liberalization are weaker when imposed
upon fragile banking sectors (Shehzad and Haan, 2008). In relation to our argument, evidence
has shown that financial liberalization results in increased competition, which in general will
tend to squeeze profits in the banking sector. The rapid advancements in technological
processes that have occurred over the past two decades has been a driving catalyst in
changing the culture of banking, thus enhancing the probability of financial liberalization
occurring. With banking now occurring on a global scale, the trends that occur in
international banking have evidently impacted the nature of various banking sectors. For
example, financial innovations have led to the competitive environment within the European
Unions financial sector enhancing. This has seen the size of traditional banking decreasing as
a result of such methods facing a decline in profitability. Consequently, banks have begun
adopting non-traditional methods such as placing a greater percentage of their total funds in
commercial real estate loans, which are traditionally a riskier type of loan (Mishkin et al.,
2013). Banks essentially compensate for lower profits by adopting extra credit risk, in turn
increasing non-performing loans, which have a higher risk of default. This displays that
increased competition may result in banks increasing their level of risk-taking through the
adoption of non-traditional banking methods, thus strengthening the argument made by
Keeley (1990) that competition and risk are positively correlated.
The progression of financial markets facing globalisation has lead to deregulation occurring.
The three phases involved in deregulation result in competition being fuelled by new entrants
from overseas, non-bank financial institutions and non-financial institutions. Banks often
respond to the enhanced levels of competition by developing new business and divert from
traditional banking methods. Non-traditional banking methods can be riskier and result in
excessive risk taking by banks (Mishkin et al., 2013). In addition, evidence supports the
belief that these innovations were responsible for the weakening of bank balance sheets
during the subprime financial crisis. Therefore, in the event of deregulation, banks will
respond to elevated competition levels by raising their level of risk-taking, thus supporting
the hypothesis that competition and risk are positively correlated.
When analysing the relationship between competition and risk, it’s important to note that
internal and external factors within a bank and their sector may impact the extent to which
these two factors are linked. Therefore, various strands of literature have been assessed to aid
in the strengthening of our hypothesis. Securitization may be defined as the process of taking
5. an illiquid asset or group of assets and transforming them into a security. Many theorists have
discovered that the banks whom are active in the market of securitization will respond to
increases in competition by systematically enhancing their risk (Mian and Sufi, 2009;
Nijskens and Wagner, 2011). In addition, Altunbas and Leuvensteijn (2014) also found that
banks resorting more heavily to securitization have higher incentives to increase their risk
profile. Although, the supporting literature used places reliance upon the additional factor of
securitization, this again provides evidence in support of the hypothesis that competition and
risk are positively correlated.
The process of bank consolidation may also be used to further support the argument of
competition and risk being positively associated. The removal of geographic restrictions will
be one of the potential results of banks merging to form larger entities. The consequence of
bank consolidation will see competition rising through the ability of large banks being able to
compete on a global scale, thus leading to a decline in lending to small business’s. Moreover,
banks whom are urgent to expand into new geographic markets may take increased risks
which may result in bank failure (Mishkin et al., 2013). This further supports our hypothesis
by displaying that in response to the consequences of deregulation, globalisation and
financial innovation, enhanced competition will lead to the occurrence of bank consolidation
occurring which can inevitably lead to the banks looking to geographically expand enhancing
their level of risk.
Evidence suggests that competition induces banks to take more risk, which supports our
hypothesis that the two variables are positively correlated. There are various factors
including, liberalisation, deregulation and consolidation of the banking sector, which attribute
a degree of influence upon the two variables. In addition, it is clear that these factors are
significant determinants of competitive related risk. Many theorists including Keeley (1990)
and Mishkin (2013) are concerned heavily with the relationship between the two variables,
often depicting a positive association. Moreover, this section removes any sense of ambiguity
relating to relationship between competition and risk.
Conclusion
Overall, it is clear that the topic of competition and risk is one, which still continues to
generate a major debate within the topic of banking. Some theorists believed that an increase
in competition lead to the enhancing of bank risk (Keeley, 1990), whereas others argued that
an increase in competition lead to a decrease in risk (Boyd and De Nicolo, 2005). We found
using a vast level of pre-existing research surrounding competition and risk that there is an
extensive level of both theoretical and empirical evidence in support of Keeley (1990). As a
result, this led to the formation of the hypothesis that competition and risk are positively
correlated. However, whilst competition and risk may be displayed as being positively
correlated, there are many differentiating factors, which contribute to this relationship
occurring. In addition, the extent to which the two variables impact one another can be
attributed to a series of external factors. For example, the occurrence of globalisation and
internationalisation of the financial sector has lead to deregulation and financial innovations
occurring. The result of this has seen competition enhancing for banks in which they respond
by increasing their level of risk-taking, thus highlighting a positive association. It is important
to note that external factors such as a financial crises or the development of a country can
impact the extent to which competition occurs and the degree in which bank risk transforms.
6. This essay provides a competent exploration into the extensive debate of competition and
risk; however, there are some limitations to this literature. Firstly, whilst this paper has relied
upon the use of a large amount of literature to form its hypothesis, the financial sector is
constantly changing. As a result, a limitation is that some of the pre-existing literatures used
within this essay may not be relevant as they are based upon the events which occurred in a
financial sector that is very different to the one that currently exists today.
A second limitation is that whilst this paper covers a wide range of literature to help provide
an argument in favour or against the link between competition and risk, the theories used
cover a wide range of events and contexts, thus limiting the potential breakdown and impacts
upon which each context may have on competition and risk. Therefore, when conducting
future research, one may place the focus of the literature used on only one context such as the
financial crisis and or globalisation, to provide an investigation into how this factor impacts
the correlation between competition and risk in banking.
The third limitation can be drawn from this essay failing to incorporate any numerical
figures in order to conduct a regression analysis. The use of such tools would aid in providing
a visual and more in-depth analysis about the extent to which the variables competition and
risk are linked. When conducting further research, the application of a regression analysis
through the obtainment of numerical figures may aid in providing a more advanced insight
into the topic of competition and risk and assist in establishing the extent in which the two are
linked. Furthermore, the successful application of the Lerner index in future research will aid
in identifying the exact degree of competition that exists in a specific banking market. This
will consequently allow one to accurately discover the level of risk that exists at this level of
competition, and how fluctuations in competition impact risk, thus displaying whether the
two are positively correlated.
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