Deregulation, market power and risk behaviour in Spanish banks

Abstract This paper provides empirical evidence on the effects of regulatory changes in the market power of Spanish banks. It also analyses the response of banks, in terms of risk-taking behaviour, as a result of a reduction in economic profits. We find that liberalisation measures have increased competition and eroded banks’ market power. We observe that banks with lower charter values tend to have lower equity–assets ratios (lower solvency) and to experience higher credit risk. The last evidence is new in the literature and calls for strengthening regulatory concerns about credit risk management by banks in situations of increased competition.