Competition and Bank Stability

CFS WP No. 559

51 Pages Posted: 15 Nov 2016

See all articles by Martin Richard Goetz

Martin Richard Goetz

Goethe University Frankfurt - Research Center SAFE

Date Written: November 14, 2016

Abstract

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

Goetz, Martin Richard, Competition and Bank Stability (November 14, 2016). CFS WP No. 559. Available at SSRN: https://ssrn.com/abstract=2869189 or http://dx.doi.org/10.2139/ssrn.2869189

Martin Richard Goetz (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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