Credit Market Competition and Bank Capitalization

Abstract

We document that within regional U.S. mortgage markets an increase in competition exerts differential effects on banks with large and small market shares. Large market share banks reduce capitalization and increase risk taking as a response to an increase in the intensity of competition, while small market share banks enhance capitalization and reduce risk taking. These results are tied to market shares and not driven by bank size or the level of concentration within local regional markets.

Keywords: credit market competition, bank capital, risk taking, fragility, stability

JEL Classification: D22, G21, L13