Faculty of Economics and Business Administration Publications Database

Prudence as a Competitive Advantage: On the Effects of Competition on Banks'' Risk-Taking Incentives

Volume: 60
Pages: 127 - 143
Month: May
ISSN-Print: 0014-2921
Link External Source: Online Version
Year: 2013
Keywords: Banking; Risk taking
Abstract: This paper builds on the notion that corporate borrowers care about the overall riskiness of a bank''s operations as their continued access to credit may depend on the bank''s ability to roll over loans or to expand existing credit facilities. A key implication of this observation is that increasing competition among banks should have an asymmetric impact on banks'' incentives to take on risk: Banks that are already riskier will take on yet more risk, while their safer rivals will become even more prudent.