Does Competition Affect Bank Risk?
52 Pages Posted: 13 Jan 2017 Last revised: 20 Mar 2018
Date Written: March 2018
Although policymakers often discuss tradeoffs between bank competition and stability, past research provides differing theoretical perspectives and empirical results on the impact of competition on risk. In this paper, we employ a new approach for identifying exogenous changes in the competitive pressures facing individual banks and discover that an intensification of competition materially boosts bank risk. Consistent with the competition-fragility view, we show that competition decreases bank profits and charter values. With respect to the mechanisms, we find that competition reduces relationship lending and increases banks’ provision of nontraditional banking services and lending to risker firms.
Keywords: Competition, Bank Risk Taking, Bank Deregulation
JEL Classification: G21, G28, G32, G38
Suggested Citation: Suggested Citation