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The impact of market power at bank level in risk-taking: The Brazilian case

Author

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  • Tabak, Benjamin M.
  • Gomes, Guilherme M.R.
  • da Silva Medeiros, Maurício
Abstract
This paper seeks to examine the competitive behavior of the Brazilian banking industry by conducting an analysis at the level of individual banks to gain an understanding of how the risk-taking behaviors of banks are affected by their degree of market power. Our results suggest that the Brazilian banking industry is characterized by monopolistic competition. Our foremost finding is that the market power of Brazilian banks is negatively related to their risk-taking behavior, regardless of changes in banks' capital levels. Banks that experience a decline in market power, while simultaneously increasing their capital levels, tend to assume higher risk levels. After the Global Financial Crisis period, we find that Private and Foreign banks became risk averse. We also verify that State-Owned banks engaged in riskier activities to increase their market share after the crisis. These results have important implications for the design of appropriate financial regulations.

Suggested Citation

  • Tabak, Benjamin M. & Gomes, Guilherme M.R. & da Silva Medeiros, Maurício, 2015. "The impact of market power at bank level in risk-taking: The Brazilian case," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 154-165.
    • Handle: RePEc:eee:finana:v:40:y:2015:i:c:p:154-165
    DOI: 10.1016/j.irfa.2015.05.014
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    More about this item

    Keywords

    Bank competition; Risk-taking; Market power; Emerging markets;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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