The Review of Corporate Finance Studies Vol. 10 No. 4 2021
Effect of the Equity Capital Ratio on the Relationship between Competition and Bank Risk-Taking Behavior
Abstract
We examine how the relationship between competition and risk-taking changes with the ex ante bank equity capital ratio. We show that competition in the banking market, on average, mitigates risk-taking by banks. This relationship, however, can be altered by a bank’s ex ante equity capital ratio. More specifically, when face with increased competition, banks with low ex ante equity capital ratios engage in relatively larger reductions in risk-taking. They do so primarily by decreasing the risk in their lending portfolios. In contrast, banks with high enough ex ante equity capital ratios might not reduce their risk-taking at all.
- DOI
- 10.1093/rcfs/cfab009
- Volume
- 10
- Issue
- 4
- Pages
- 813-855
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref