Bank Competition and Financial Stability: Evidence from the Financial Crisis
51 Pages Posted: 12 Apr 2014 Last revised: 2 Jun 2016
Date Written: April 10, 2014
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: Suggested Citation