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Impact of the Heterogeneity in Market Power on the Relationship Between Risk Taking and Competition: Case of the Chilean Banking Sector

Until the end of the 1990s, the existence of a negative relationship between banking competition and stability was generally accepted in the economic literature. Since then, a new point of view has emerged questioning this relationship and instead argues about the existence of a positive relationship between these two variables. This paper studies the impact of the heterogeneity in market power on this relationship through the case of the Chilean banking sector. The results indicate that this kind of heterogeneity can play an important role in the relationship between risk taking and competition.