Competition, Risk Taking and Efficiency in the US Commercial Banks Prior to 2008 Financial Crisis
21 Pages Posted: 11 Feb 2012
Date Written: February 10, 2012
The purpose of the current paper is to examine the level (degree) of competition, risk-taking behavior and efficiency with respect to the US commercial banks (large, medium, and small). The Lerner Index is used to measure competition in the US banking sector. In the next step, the Gruben et al (2003) simultaneous equations model tests for Risk-Taking Behavior of commercial banks. Then, the Stochastic Frontier Approach (SFA) is used to measure bank competition. In the final step, we study the relation between efficiency and competition. All of these models reveal information that is vital to understanding one of the key areas of bank behavior, namely bank risk taking. We collect data from 2003 to 2007, prior to the financial meltdown.
Suggested Citation: Suggested Citation