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 language | English |
|---|---|
| Place of Publication | Tilburg |
| Publisher | TILEC |
| Number of pages | 12 |
| Volume | 2007-010 |
| Publication status | Published - 2007 |
Publication series
| Name | TILEC Discussion Paper |
|---|---|
| Volume | 2007-010 |
UN SDGs
This output contributes to the following UN Sustainable Development Goals (SDGs)
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SDG 1 No Poverty -
SDG 8 Decent Work and Economic Growth -
SDG 10 Reduced Inequalities
Keywords
- loan market competition
- risk shifting
- bank stability
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