Bank risk-taking in developed countries: The influence of market power and bank regulations

Abstract

Using a sample of 6936 banks in 25 developed countries between 2007 and 2015, the paper explores the impact of market power and bank regulatory variables, such as capital stringency, restrictions in activities and the power of supervisory agencies, on bank stability. Various dimensions of bank risk exposures are considered. and the findings reveal that higher market power in banking decreases the risky behavior of banks, confirming that the competition-fragility view holds. Capital requirements are the strongest regulatory tool for decreasing bank risk, and they decrease bank risk more for banks with more market power. Higher activity restrictions strongly increase bank risk for developed markets, even though the increase in riskiness is mitigated for banks with higher market power. While powerful supervisory agencies, in general, lead to an increase in bank risk, this increase is exacerbated for higher market-powered banks.