Journal of Economics

, Volume 82, Issue 3, pp 249–280 | Cite as

Market Structure and Risk Taking in the Banking Industry

  • Oz Shy
  • Rune Stenbacka


We demonstrate that the common view according to which an increase in competition leads banks to increased risk taking fails to hold in an environment where homogeneous loss averse consumers can choose in which bank to make a deposit based on their knowledge of the riskiness incorporated in the banks’ outstanding loan portfolios. With an exclusive focus on imperfect competition we find that banks’ incentives for risk taking are invariant to a change in the banking market structure from duopoly to monopoly. Finally, we show that deposit insurance would eliminate the gains from bank competition when banks use asset quality as a strategic instrument.


risk taking in banking market structure bank competition deposit insurance 

JEL classification

G21 G28 E53 


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Copyright information

© Springer-Verlag Wien 2004

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of HaifaHaifaIsrael
  2. 2.Department of EconomicsSwedish School of EconomicsHelsinkiFinland

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