Competition and Bank Fragility

35 Pages Posted: 23 Jun 2017 Last revised: 24 Jun 2017

W. Blake Marsh

Federal Reserve Bank of Kansas City

Rajdeep Sengupta

Federal Reserve Bank of Kansas City

Date Written: June 9, 2017

Abstract

We present empirical evidence documenting how increased competition can affect the fragility of banks using U.S. banking data from 1990 to 2005. In particular, we find that local banks belonging to community (CBOs) and regional banking organizations (RBOs) increased their share of CRE loans as competition from large banking organizations (LBOs) increased. The paper traces the build-up in CRE concentrations in such local banks before the financial crisis to the expansions of LBO activity into local banking markets. After instrumenting for LBO entry into new markets, we find a steady and continuous increase in CRE loan shares at local banks. CRE concentrations were a principal cause of post-crisis bank failures, and this paper presents evidence showing how competition increases not just individual bank fragility, but the stability of the banking sector as a whole.

Keywords: Bank Lending, Bank Regulation, Commercial Real Estate

JEL Classification: E44, G21, G28

Suggested Citation

Marsh, W. Blake and Sengupta, Rajdeep, Competition and Bank Fragility (June 9, 2017). Federal Reserve Bank of Kansas City Working Paper No. 17-06. Available at SSRN: https://ssrn.com/abstract=2991239

Blake Marsh (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Drive
Kansas City, MO 64198
United States

Rajdeep Sengupta

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

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