Research Discussion Papers, Bank of Finland
No 22/1998:
Market Structure and Risk Taking in the Banking Industry
Oz Shy and Rune Stenbacka ()
Abstract: This study demonstrates that the common view, whereby an
increase in competition leads banks to increased risk taking, fails to hold
in an environment where consumers can choose in which bank to make a
deposit based on their knowledge of the riskiness incorporated in the
banks' outstanding loan portfolios. We show that, in the absence of deposit
insurance, competition between differentiated banks will increase the
returns from diversification. We offer a welfare analysis establishing that
introduction of competition into the banking industry can only improve
social welfare. However, competition cannot always guarantee that
diversification will occur to a socially optimal extent. Finally, we show
that deposit insurance would eliminate the beneficial effects of banks
competing with asset quality as a strategic instrument.
Keywords: risk taking in banking; banks' portfolio diversification; bank competition; deposit insurance; (follow links to similar papers)
JEL-Codes: E53; G21; G28; (follow links to similar papers)
32 pages, October 27, 1998
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
DP_22_1998.pdf 
Download Statistics
Questions (including download problems) about the papers in this series should be directed to Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design by Joachim Ekebom
