Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Bank of Finland 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    PDF-file
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

Handle: RePEc:hhs:bofrdp:1998_022 This page was generated on 2015-03-25 00:30:04