Deposit Market Competition Research Articles

Competition, coinsurance and moral hazard in banking

This study examines the interaction between bank deposit market competition, incentives to take risks on the asset side, and willingness to participate in the interbank market for liquidity coinsurance. The interbank market in the model has two countervailing effects on risk-taking. First, it allows for more profitable long-term investment, which adds to a bank’s charter value and decreases risk-taking motives. Second, greater investment in the long-term asset also makes risk-taking potentially more profitable, thus eroding charter value. Finally, risk-taking motives also influence banks’ decisions to participate in the interbank market. We demonstrate how a combination of capital requirements and posting a surety bond can restore charter value, promote cooperation and boost economic activity. Additionally, this measure does not limit competition in generating charter value and implies lower costs than capital requirements alone.

Deposit Market Competition during the Great Financial Crisis

Deposit Market Competition during the Great Financial Crisis

The Strategic Use of Corporate Philanthropy: Evidence from Bank Donations

Abstract This article examines the strategic nature of banks’ charitable giving by studying bank donations to local nonprofit organizations. Relying on the application of antitrust rules in bank mergers as an exogenous shock to local deposit market competition, we find that local competition affects banks’ local donation decisions. Using county-level natural disaster shocks, we show that banks with disaster exposure reallocate donations away from nonshocked counties, where they operate branches, and toward shocked counties. The reallocation of donations represents an exogenous increase in the local share of donations in nonshocked counties for banks with no disaster exposure and leads to an increase in the local deposit market shares of such banks. Furthermore, banks can potentially earn greater profits from making donations and tend to donate to nonprofits that have the most social impact. Overall, our evidence suggests that banks participate in corporate philanthropy strategically to enhance performance.

Competitive Conditions in Nepalese Commercial Banks

This study aims to analyze the competitive conditions of commercial banks in Nepal. Competition is measured through structural and non-structural measures of bank competition. Data were taken from 21 commercial banks of Nepal using pooled sampling method, including five commercial banks based on the highest total assets and sixteen commercial banks using random sampling. Concentration ratio, Herfindahl-Hirschman Index, H-statistic and Lerner Index measures were used to assess the competitive position of Nepalese commercial banks. Panel data regression model with bank fixed effect and time fixed effect was employed to measure H-statistic and Lerner index. Findings showed the increasing pattern of capitalization and the decreasing trend of non-performing loan ratio, indicating that Nepalese commercial banks have a low possibility of loan default and, are more financially stable. It also showed the declining trend of bank concentration and HHI, suggesting that Nepalese commercial banks are losing their monopoly power and becoming more competitive in recent years. Competition in the loan market was found higher than deposit market competition. Banks have to pay special attention to loan portfolio management rather than deposit collection strategies. This study concludes that the competitive condition of Nepalese commercial banks is monopolistic. Therefore, appropriate strategies might be taken into action to sell financial products and services competitively.

Competition and Profitability in the Chinese Banking Industry: New Evidence from Different Ownership Types

This paper tests the competition in different banking markets in China (deposit, loan, and non-interest income markets) using a sample of Chinese commercial banks (state-owned, joint-stock, and city commercial banks) over the period 2003–2013 and further examines the impact of competition on bank profitability for the whole sample and also for different ownership types. The results show that non-interest income market in the Chinese banking industry has a higher level of competition compared to the other two markets during the early years of the examined period. The findings further report that in a higher competitive deposit market, Chinese commercial banks have lower levels of profitability. Finally, the results suggest that a higher competitive loan market leads to higher profitability of all these three types of banks while the impact of deposit market competition is significant and negative.

Switching costs and financial stability

We establish that the effect of intensified deposit market competition, measured by reduced switching costs, on the probability of bank failures depends critically on whether we focus on competition with established customer relationships or competition for the formation of such relationships. With inherited customer relationships, intensified competition due to lower switching costs destabilizes the banking market, whereas it stabilizes the market if we focus on competition for the formation of customer relationships. We characterize the factors important for evaluating the effects of intensified competition on stability in a market with unattached as well as locked-in depositors.

Bank competition, real investments, and welfare

The study constructs an overlapping-generations model to analyze the hypothesis that large banking sectors divert resources from productive activities. We characterize the conditions under which trade in financial ownership may extract resources from real investment, and compare it to crowding out by non-bank equity. In particular, we assess the effects of intensified deposit market competition and of risky investments in the non-banking sector on this distortion.

Study on the impact of Taiwan's deposit and loan market competition on the risk bearing of the bank

The “third financial reforms” in Taiwan set off a wave of merger and reorganization of the banking. In this paper, by constructing the Lerner Index of commercial bank deposit and loan market, it is found that the degree of competition in the loan market of commercial banks in Taiwan is decreasing, and the competition degree of the deposit market is rising. Based on the balance panel data of Taiwan's commercial Banks from 2012 to 2014, the paper empiricised the impact of the competition on the bank's deposit and loan market on its risk-taking behavior after the “third financial reform”. The research conclusion shows that :(1) the competition of commercial bank loan market and its risk bearing are”U”type relationship; (2) the deposit market competition can significantly reduce the risk of commercial Banks; (3) the assets scale of commercial Banks has contributed to the relationship between their “deposit market forces --financial fragility”; (4) the capital of commercial Banks can effectively enhance the degree of the loan market forces’ inhibition of bank risk behaviors.

Evaluation of deposit market competition: basis for bank marketing improvement

Evaluation of deposit market competition: basis for bank marketing improvement

The impacts of competition and shadow banking on profitability: Evidence from the Chinese banking industry

This paper contributes to the empirical literature on banking profitability by testing the impacts of competition and shadow banking on bank profitability using a sample of 100 Chinese commercial banks over 2003–2013 with 417 and 395 observations. The current study fills the gaps in the empirical studies by examining the competition in different banking markets (i.e. deposit market, loan market and non-interest income market) in China and further evaluating their impacts on bank profitability. The findings show that the non-interest income market has a higher level of competition compared to the deposit market and loan market. It is further reported that a lower level of competition in deposit market leads to an increase in the profitability of Chinese commercial banks. Finally, the results suggest that shadow banking improves the profitability of Chinese banks.

The Impacts of Competition and Shadow Banking on Profitability: Evidence from the Chinese Banking Industry

This paper contributes to the empirical literature in banking profitability by testing the impacts of competition and shadow banking on bank profitability using a sample of 100 Chinese commercial banks over 2003-2013 with 417 and 395 observations. The current study fills the gaps in the empirical studies by examining the competition in different banking markets (i.e. deposit market, loan market and non-interest income markets) in China and further evaluate their impacts on bank profitability. The findings show that the non-interest income market has a higher level of competition compared to the deposit market and loan market. It is further reported that a lower level of competition in deposit market leads to an increase in the profitability of Chinese commercial banks. Finally, the results suggest that shadow banking improves the profitability of Chinese banks.

The Crowding-Out Effects of Large Banking Sectors

The study constructs an overlapping-generations model to analyze the hypothesis that large banking sectors divert resources from productive activities. We characterize the conditions under which trade in financial ownership may extract resources from real investment, and compare it to crowding out by non-bank equity. In particular, we assess the effects of intensified deposit market competition and of risky investments in the non-banking sector on this distortion.

Market Power, Loan Market Diversification, and Risk-Return Trade-Offs within Banking Sectors

This study finds increases in market power of dominant banks are accompanied by expansion in aggregate sizes of deposit markets. Consistent with adverse effects of market power, non-dominant banks gain smaller shares of new deposit markets. Regardless of decrease in market shares, non-dominant banks' risk-return trade-offs map monotonically to estimates of bank risk; that is, demonstrate absence of risk shifting activities. While empirical results show individual banks exhibit monopolist behaviors in loan pricing, market competition induces attenuation, as opposed to accentuation of monopolist pricing. Empirical findings demonstrate loan market diversification attenuates risk effects of market power, resulting in banking sectors within which deposit market competition is beneficial for stability of risk-return trade-offs.

Switching Costs and Financial Stability

We establish that the effect of intensified deposit market competition, measured by reduced switching costs, on the probability of bank failures depends critically on whether we focus on competition with established customer relationships or competition for the formation of such relationships. With inherited customer relationships, intensified competition (i.e., lower switching costs) destabilizes the banking market, whereas it stabilizes the banking market if we shift our focus to competition for the formation of customer relationships. These findings imply that the proportion between new and locked-in depositors is decisively important when determining whether intensified competition destabilizes the banking market or not.

Deposit market competition, wholesale funding, and bank risk

Empirical research on the effect of bank competition on bank risk has so far produced very inconclusive results. In this paper we revisit this long-standing debate and propose a new empirical approach that is concentrated on the relationship between deposit market competition and bank risk. This approach closely follows the traditional theoretical views of the competition and risk relationship and is focused on testing the classical moral hazard problem of the bank: deposit market competition raises the optimal risk choice of the bank by raising the costs of bank liabilities. Since banks can substitute between retail and wholesale funding, we relate deposit market competition to wholesale market conditions and examine their joint effect on the risk of bank assets. The analysis is based on a unique, comprehensive dataset, which combines retail deposit rate data with data on bank characteristics and data on local deposit market features for a sample of 589 US banks. Our results support the notion of a risk-enhancing effect of deposit market competition.

Deposit Market Competition, Wholesale Funding, and Bank Risk

In this paper we revisit the long debate on the risk effects of bank competition and propose a new approach to the empirical estimation of the relation between deposit market competition and bank risk. Our approach accounts for the opportunity of banks to shift to wholesale funding when deposit market competition is intense. The analysis is based on a unique comprehensive dataset which combines retail deposit rates data with data on bank characteristics and with data on local deposit market features for a sample of 589 U.S. banks. Our results support the notion of a risk-enhancing effect of deposit market competition.

Membership Structure, Competition, and Occupational Credit Union Deposit Rates

How do occupational credit unions set deposit rates? This article shows that the answer to this question will depend on (i) who actually makes business decisions in credit unions (who is in control), and (ii) whether local deposit market competition is important. It is not obvious who controls occupational credit unions. If the sponsor (the employer) is in control, then loans and deposits are priced to maximize the surplus received by all of the credit union’s current and potential members (those eligible to join). If members are in control, then a group of members with a majority can maximize its own surplus. The group in control may include members whose primary purpose for joining the credit union is to borrow money or, alternatively, to lend money (make deposits). If local deposit-market competition is the dominant influence, then internal characteristics of the credit union won’t matter at all. This study tests the sponsor-> control, the member-control, and the market-control hypotheses against each other using a large sample of occupational credit unions observed in 1997. Our results suggest that sponsors exercise effective control over occupational credit unions.