A common assumption in the academic literature and in the supervision of banking systems is that franchise value plays a key role in limiting bank risk-taking. As market power is the primary source of franchise value, reduced competition in banking markets has been seen as promoting banking stability. A recent paper by Martínez-Miera and Repullo (MMR, 2010) shows that a nonlinear relationship theoretically exists between bank competition and risk-taking in the loan market. We test this hypothesis using data from the Spanish banking system. After controlling for macroeconomic conditions and bank characteristics, we find support for this nonlinear relationship using standard measures of market concentration in both the loan and deposit markets. When direct measures of market power, such as Lerner indices, are used, the empirical results are more supportive of the original franchise value hypothesis, but only in the loan market. Overall, the results highlight the empirical relevance of the MMR model, even though further analysis across other banking markets is needed.

We analyze the global banking network using data on cross-border banking flows for 184 countries during 1978–2010. We find that the density of the global banking network defined by these flows is pro-cyclical, expanding and contracting with the global cycle of capital flows. We also find that country connectedness in the network tends to rise before banking and debt crises and to fall in their aftermath. Despite a historically unique build-up in aggregate flows prior to the global financial crisis, network density in 2007 was comparable to earlier peaks. This suggests that factors other than connectedness, such as the location of the initial shock to the core of the network, have contributed to the severity of the crisis. The global financial crisis stands out as an unusually large perturbation to the global banking network, with indicators of network density in 2008 reaching all-time lows.