Does Competition Affect Bank Risk?

52 Pages Posted: 13 Jan 2017 Last revised: 20 Mar 2018

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: March 2018

Abstract

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

Jiang, Liangliang and Levine, Ross Eric and Lin, Chen, Does Competition Affect Bank Risk? (March 2018). Available at SSRN: https://ssrn.com/abstract=2898570 or http://dx.doi.org/10.2139/ssrn.2898570

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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