Bank Competition and Financial Stability: Evidence from the Financial Crisis

51 Pages Posted: 12 Apr 2014 Last revised: 2 Jun 2016

Brian Akins

Rice University - Jesse H. Jones Graduate School of Business

Lynn Li

Boston University - Questrom School of Business

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Tjomme O. Rusticus

University of Minnesota

Date Written: April 10, 2014

Abstract

We examine the link between bank competition and financial stability using the recent financial crisis as the setting. We utilize variation in banking competition at the state level and find that banks facing less competition are more likely to engage in risky activities, more likely to face regulatory intervention, and more likely to fail. Focusing on the real estate market, we find that states with less competition had higher rates of mortgage approval, experienced greater housing price inflation before the crisis, and a steeper housing price decline during it. Overall, our study is consistent with greater competition increasing financial stability.

Keywords: competition, risk-taking, bank regulation, bank failure

JEL Classification: G01, G21, G33

Suggested Citation

Akins, Brian and Li, Lynn and Ng, Jeffrey and Rusticus, Tjomme O., Bank Competition and Financial Stability: Evidence from the Financial Crisis (April 10, 2014). Journal of Financial and Quantitative Analysis, 51(1), (2016), 1-28.; Boston U. School of Management Research Paper No. 2423584; Singapore Management University School of Accountancy Research Paper No. 2014-17. Available at SSRN: https://ssrn.com/abstract=2423584

Brian K. Akins

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Lynn Li

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Tjomme O. Rusticus (Contact Author)

University of Minnesota ( email )

Carlson School of Management
321 19th Avenue South, Room 3-122
Minneapolis, MN 55455
United States

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