Abstract
This paper aims to examine the competitive behavior of Brazilian banking industry and through a more individual analysis understand how risk-taking can be affected by banks' market power. Therefore, we compute market power at the bank-level and aggregate this variable in a risk-taking model. Our findings suggest that Brazilian banking industry presents a significant heterogeneity of banks' market power and is characterized as monopolistic competition. Another important result is that market power is positively related to risk-taking. We also verify that banks' capitalization has an important influence in market power, which affects risk-taking. An increase in capital leads banks with higher market power to assume less risk. We verify that an increase in capital makes banks with higher market power behave more conservative. These results are important for the design of proper financial regulation.
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