Bank Competition: Measurement, Decision-Making, and Risk-Taking
Posted: 22 Oct 2016
Date Written: June 1, 2016
This paper investigates whether greater competition increases or decreases individual bank and banking system risk. Using a new text-based measure of competition, and an instrumental variables analysis that exploits exogenous variation in bank deregulation, we provide robust evidence that greater competition increases both individual bank risk and a bank's contribution to system-wide risk. Specifically, we find that higher competition is associated with lower underwriting standards, less timely loan loss recognition, and a shift toward noninterest revenue. Further, we find that higher competition is associated with higher stand-alone risk of individual banks, greater sensitivity of a bank's downside equity risk to system-wide distress, and a greater contribution by individual banks to downside risk of the banking sector.
Keywords: banking, competition, stability, financial statement analysis, regulation, contracting, timely loss recognition
JEL Classification: G2, H32, L00, M4
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