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Market-Based Solutions to Vital Economic Issues
Research
Apr 28, 2016

Bank Competition: Measurement, Decision­-Making and Risk-Taking

Abstract

This paper investigates whether greater competition increases or decreases individual bank and banking system risk. Using a new text-based measure of competition, and an instrumental variables analysis that exploits exogenous variation in bank deregulation, we provide robust evidence that greater competition increases both individual bank risk and a bank’s contribution to system-wide risk. Specifically, we find that higher competition is associated with lower underwriting standards, less timely loan loss recognition, and a shift toward noninterest revenue. Further, we find that higher competition is associated with higher stand-alone risk of individual banks, greater sensitivity of a bank’s downside equity risk to system-wide distress, and a greater contribution by individual banks to downside risk of the banking sector.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


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