PDFDownload paper, RWP 20-21, December 2020; updated January 2022
As banking markets integrate, bank competition increases with the expansion in market size because deposit supply and loan demand become more elastic. At the same time, the expansion in the measure of depositors is not always equal to the expansion in the measure of borrowers. This unequal expansion is sufficient to generate a hitherto unexplored risk-incentive mechanism that operates through loan rates, which we term the "bank-customer effect''. A sufficiently strong bank-customer effect of market integration can reverse any relation between competition and risk-taking that prevails when markets are segmented.
JEL Classification: D82, G21, L13
- Dam, Kaniska, and Rajdeep Sengupta. 2020. “Bank Competition and Risk-Taking under Market Integration.” Federal Reserve Bank of Kansas City, Research Working Paper no. 20-21, December. Available at External Linkhttps://doi.org/10.18651/RWP2020-21