The Link Between Bank Competition and Risk in the United Kingdom: Two Views for Policymaking

39 Pages Posted: 8 Sep 2020

See all articles by Sebastian de-Ramon

Sebastian de-Ramon

Bank of England; Bank of England - Prudential Regulation Authority; Cambridge Econometrics

William Francis

Bank of England

Michael Straughan

Bank of England - Prudential Regulation Authority; Bank of England

Date Written: September 4, 2020

Abstract

We use quantile regression to examine the links between competition and firm-level solvency risk for all banks and building societies in the United Kingdom between 1994 and 2013. Quantile regression provides a finer picture of the relationship (as compared with standard regression techniques) across institutions ranked according to how close each is to insolvency. We find that for domestic banks and building societies already close to insolvency the association is favourable, suggesting that risk decreases (increases) with more (less) competition. For foreign-owned banks and for relatively healthy building societies farther from insolvency we find the opposite, indicating that risk increases (decreases) with more (less) competition. We find that regulation is effective in moderating adverse links between risk and competition. Our results highlight real differences in the links between competition and risk at the individual level that are useful for assessing the link at the system-wide level.

Keywords: Bank competition, bank risk, Boone indicator, quantile regression

JEL Classification: G21, G28, L22

Suggested Citation

de-Ramon, Sebastian and Francis, William and Straughan, Michael and Straughan, Michael, The Link Between Bank Competition and Risk in the United Kingdom: Two Views for Policymaking (September 4, 2020). Bank of England Working Paper No. 885, Available at SSRN: https://ssrn.com/abstract=3688108 or http://dx.doi.org/10.2139/ssrn.3688108

Sebastian De-Ramon (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Bank of England - Prudential Regulation Authority ( email )

20 Moorgate
London, EC2R 6DA
United Kingdom

Cambridge Econometrics ( email )

Reuben House
Covent Garden
Cambridge, CB1 2HT
United Kingdom

HOME PAGE: http://https://www.bankofengland.co.uk/research/researchers/sebastian-de-ramon

William Francis

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Michael Straughan

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Bank of England - Prudential Regulation Authority ( email )

20 Moorgate
London, EC2R 6DA
United Kingdom

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