COMPETITION, RISK TAKING AND FRAGILITY IN FINANCIALLY INTEGRATED BANKING MARKETS

While most observers expect significant benefits from integrating national banking markets there is far less consensus about the precise sources of efficiency gains and potential losses from integration. This research project has as its goal to address a number of crucial issues regarding the consequences of increased competition in the banking industry as well as in the financial markets more generally. What is the relationship between loan market competition and credit market fragility? Even if loan market competition would increase credit market fragility, it need not imply a policy conclusion that competition should be restricted since the generated credit market fragility should be evaluated against criteria defining the socially optimal bankruptcy risks. Also, what is exactly the relationship between the lending market structure and the banks' incentives to invest in ex ante project monitoring and credit evaluation? How should we design policies so as to balance the degree of banking competition and the incentives for banks to acquire project-specific information in a socially optimal way? Is there some systematic relationship between the liquidity of projects funded, capital structure and the degree of imperfections in the financial markets? This research project consists of the following subprojects: I. Market Structure and Risk Taking in the Banking Industry (with Professor Oz Shy, University of Haifa) II. Is There a Tradeoff between Bank Competition and Financial Fragility? (with Professor Erkki Koskela, University of Helsinki) III. Information Acquisition in Lending Markets (with Professor Vesa Kanniainen, University of Helsinki) IV. Information Exchange in Lending Markets (with Professor Thomas Gehrig, University of Freiburg and Rice University) V. Agency Cost of Debt and Lending Market Competition: Is There a Relationship? (with Professor Erkki Koskela, University of Helsinki) VI. Information Advantages of Incumbent Banks and the Dynamics of Lending Market Structure VII. Liquidity Risks, Investment Distortions and Deposit Insurance: A Bundling Argument for Narrow Banking (with Professor Oz Shy, University of Haifa) VIII. Project Selection, Capital Structure and Endogenous Liquidity (with Dr Tuomas Takalo, University of Helsinki and MIT). The individual research projects outlined above will all primarily generate articles which will be submitted to be reviewed by international scientific journals of high quality. The author will also produce a few research-based domestic articles intended for a broader audience including policy makers and decision makers in the business world.