This paper presents a model of a banking industry with
heterogeneous banks that delivers predictions on the relationship between
banks' risk of failure, market structure, bank ownership, and banks'
screening and bankruptcy costs. These predictions are explored empirically
using a panel of individual banks data and ownership information
including more than 10,000 bank-year observations for 133 non-industrialized
countries during the 1993-2004 period. Four main results obtain. First,
the positive and significant relationship between bank concentration and
bank risk of failure found in Boyd, De Nicolò and Al Jalal (2006) is
stronger when bank ownership is taken into account, and it is strongest
when state-owned banks have sizeable market shares. Second, conditional
on country and firm specific characteristics, the risk profiles of
foreign (state-owned) banks are significantly higher than (not
significantly different from) those of private domestic banks. Third, private
domestic banks do take on more risk as a result of larger market shares of
both state-owned and foreign banks. Fourth, the model rationalizes this
evidence if both state-owned and foreign banks have either larger
screening and/or lower bankruptcy costs than private domestic banks, banks'
differences in market shares, screening or bankruptcy costs are not
too large, and loan markets are sufficiently segmented across banks of
different ownership.

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