Loan Market Competition and Bank Risk-Taking

W.B. Wagner

Research output: Working paperDiscussion paperOther research output

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Abstract

Recent literature (Boyd and De Nicoló, 2005) has argued that competition in the loan market lowers bank risk by reducing the risk-taking incentives of borrowers. We show that the impact of loan market competition on banks is reversed if banks can adjust their loan portfolios. The reason is that when borrowers become safer, banks want to offset the effect on their balance sheet and switch to higher-risk lending. They even overcompensate the effect of safer borrowers because loan market competition erodes their franchise values and thus increases their risk-taking incentives.
Original languageEnglish
Place of PublicationTilburg
PublisherTILEC
Number of pages12
Volume2007-010
Publication statusPublished - 2007

Publication series

NameTILEC Discussion Paper
Volume2007-010

Fingerprint

Loans
Market competition
Bank risk taking
Incentives
Risk taking
Franchise value
Balance sheet
Bank risk
Loan portfolio
Lending

Keywords

  • loan market competition
  • risk shifting
  • bank stability

Cite this

Wagner, W. B. (2007). Loan Market Competition and Bank Risk-Taking. (TILEC Discussion Paper; Vol. 2007-010). Tilburg: TILEC.
Wagner, W.B. / Loan Market Competition and Bank Risk-Taking. Tilburg : TILEC, 2007. (TILEC Discussion Paper).
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Wagner, WB 2007 'Loan Market Competition and Bank Risk-Taking' TILEC Discussion Paper, vol. 2007-010, TILEC, Tilburg.

Loan Market Competition and Bank Risk-Taking. / Wagner, W.B.

Tilburg : TILEC, 2007. (TILEC Discussion Paper; Vol. 2007-010).

Research output: Working paperDiscussion paperOther research output

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Wagner WB. Loan Market Competition and Bank Risk-Taking. Tilburg: TILEC. 2007. (TILEC Discussion Paper).