1BETA - Bureau d'Économie Théorique et Appliquée (Université de Lorraine, UFR Droit Sciences Economiques et Gestion, 13 place Carnot CO 70026, 54035 Nancy Cedex
Université de Strasbourg, Faculté des Sciences Economiques et de Gestion, 61 avenue de la Forêt Noire 67085 Strasbourg Cedex
- France)
AgroParisTech (16 rue Claude Bernard F-75231 Paris Cedex 05 - France)
Abstract : We examine the relation between intensity of competition in the loan market and risk of bank failure, in a model with adverse selection. As well established, the presence of the two opposite margin and risk-shifting effects creates conditions for nonmonotonicity: the conventional competition-fragility view may be challenged at high interest rates. These rates may however be too high to be compatible with oligopolistic equilibrium conditions. The challenging competition-stability view has been argued in terms of a representative borrower managing the profitability-safeness trade-off under moral hazard. However, the representative borrower assumption is not innocuous, playing down by construction the margin effect. The paper considers the adverse selection situation where that trade-off is managed by banks facing heterogeneous borrowers, and shows analytically, in the case of a trapezoidal distribution of idiosyncratic and systemic risk factors, that the conventional view is always valid.
https://hal.univ-lorraine.fr/hal-03595060 Contributor : Touria BagardConnect in order to contact the contributor Submitted on : Thursday, March 3, 2022 - 10:03:52 AM Last modification on : Saturday, April 16, 2022 - 3:36:41 AM
Rodolphe dos Santos Ferreira, Leonor Modesto. Competition and the risk of bank failure : Breaking with the representative borrower assumption. Journal of Public Economic Theory, Wiley, 2021, 23 (4), pp.622-638. ⟨10.1111/jpet.12509⟩. ⟨hal-03595060⟩