Does Competition Affect Bank Risk?

28 Pages Posted: 22 Aug 2016 Last revised: 23 Aug 2016

See all articles by Liangliang Jiang

Liangliang Jiang

Hong Kong Polytechnic University

Ross Levine

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 18, 2016

Abstract

Although policymakers often discuss tradeoffs between competition and stability, past research provides differing theoretical perspectives and conflicting empirical results on whether competition destabilizes banks. In this paper, we employ a new approach for identifying exogenous changes in the competitive pressures facing individual banks and use this approach to assess the impact of competition on bank risk. We discover that an intensification of bank competition materially boosts bank risk. We also find suggestive evidence that this positive relationship is driven by reduced bank profit margins, lowered bank charter value, provision of nontraditional services, and diminished relationship lending.

Keywords: Competition; Bank Risk Taking; Bank Deregulation

JEL Classification: G21; G28; G32; G38

Suggested Citation

Jiang, Liangliang and Levine, Ross Eric and Lin, Chen, Does Competition Affect Bank Risk? (August 18, 2016). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2826297

Liangliang Jiang (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Ross Eric Levine

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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