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Abstract
Banking competition induces an efficient outcome but may also induce risk-taking behaviour that reduces solvency. This study examines the relationship between efficiency and solvency in banking at the empirical level. The empirical findings support that greater efficiency with respect to a risk–return frontier leads to a greater solvency level, but solvency is not related to efficiency. So, an increase in banking competition generates both more efficiency and solvency.
Acknowledgements
The author thanks José Luís Raymond and seminar participants at Universidad Autónoma de Barcelona, EARIE, Simposio de Análisis Económico, Jornadas de Economía Financiera, and Jornadas de Economía Industrial for valuable comments and suggestions. Financial support from the Galician Government (grant PGIDIT02PXIA20101PR) is gratefully acknowledged.
Notes
1 This literature includes Diamond (Citation1984), Boyd and Prescott (Citation1986), Willianson (Citation1986), Allen (Citation1990), and Boyd and Runkle (Citation1993).
2 See Keely (Citation1990) and Hellmann et al. (Citation2000).