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Implications of Shifting Retail Market Shares for Loan Monitoring in a Dominant‐Bank Model
Author(s) -
VanHoose David
Publication year - 2013
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/sjpe.12012
Subject(s) - participation loan , loan , incentive , asset (computer security) , asset quality , business , liability , competition (biology) , concentration risk , interdependence , portfolio , monetary economics , market share , non conforming loan , non performing loan , financial system , cross collateralization , economics , finance , microeconomics , capital adequacy ratio , ecology , computer security , computer science , political science , law , biology
This study utilizes a dominant‐bank model to investigate whether an increase in retail loan and deposit‐market concentration increases the incentives for both dominant and fringe banks to monitor their loans and thereby improve the quality of their loan portfolios. It shows that the effects on banks' incentives to engage in monitoring aimed at eliminating loan default losses in response to increased concentration of retail market shares of loans and deposits depend critically on whether the banks' asset and liability choices are interdependent. When the asset and liability decisions of both dominant and fringe banks are independent, a shift in market shares in favor of the dominant bank generates a straightforward increase in the incentives of all banks to monitor their loans. Under portfolio interdependence, the effects on monitoring outcomes at dominant banks and at banks within the competitive fringe depend on more complicated configurations of parameters. This fact helps explain mixed empirical evidence on the relationships between bank competition and measures of bank risk and soundness.