Bank Competition and Financial Stability: Evidence from the Financial Crisis
Rice University - Jesse H. Jones Graduate School of Business
Boston University - Questrom School of Business
Hong Kong Polytechnic University - School of Accounting and Finance
Tjomme O. Rusticus
University of Minnesota
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
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.
Number of Pages in PDF File: 51
Keywords: competition, risk-taking, bank regulation, bank failure
JEL Classification: G01, G21, G33
Date posted: April 12, 2014 ; Last revised: June 2, 2016