Indeed,
the positive and significant coefficient indicates that higher off-balance sheet activities
increase the the likelihood of a experiencing a distress event.10 In columns two to four
we add, one at a time, our indicators of the different dimensions of market power and
market concentration discussed in the previous section, while in column five we add all
the indicators simultaneously. In column two we add to the baseline specification the
Lerner Index which measures the ability of each single bank to price its products above
the marginal costs. The point estimate of the Lerner Index has a negative and highly significant
effect on the distress probability of banks. Increasing the pricing power of banks
(reducing competition) significantly reduces the likelihood of a distress event. The riskreducing
effect of bank-level market power is thus in line with the “competition fragility”
or “franchise value” view of the competition-bank risk taking nexus: more intense competition
between banks reduces the charter value of banks and thereby encourages banks
to take more risk. This result thus supports the majority of theoretical studies in the
bank competition-stability trade-off literature that predict a risk-increasing effect of competition
(e.g. Keeley 1990, Matutes and Vives 2000, Hellmann, Murdock, and Stiglitz
2000, Allen and Gale 2004 and Wagner 2010).