Competition and Bank Stability
CFS WP No. 559
51 Pages Posted: 15 Nov 2016
Date Written: November 14, 2016
Does an increase in competition increase or decrease bank stability? I exploit how the state-specific process of interstate banking deregulation lowered barriers to entry into urban banking markets and find that greater competition significantly increases bank stability. This result is robust to the inclusion of additional fixed effects and other influences, such as merger and acquisitions or diversification. Moreover, I find that greater competition reduces banks' nonperforming loans and increases bank profitability. These findings suggest that competition increases stability as it improves bank profitability and asset quality.
Keywords: Risk, Stability, Competition, Contestability, Entry, Bank Deregulation, Lending
JEL Classification: G21, G28, G32
Suggested Citation: Suggested Citation