Working Paper: NBER ID: w23080
Authors: Liangliang Jiang; Ross Levine; Chen Lin
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. With respect to the mechanisms, we find that competition reduces bank profits, charter values, and relationship lending and increases banks’ provision of nontraditional banking services.
Keywords: bank competition; bank risk; financial stability
JEL Codes: G21; G28; G32; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| intensification of competition (L13) | increased bank risk (G21) |
| competition reduces bank profits (G21) | encourages banks to take on riskier loans (G21) |
| competition reduces bank profits (G21) | encourages banks to turn to nontraditional banking services (G21) |
| increased competition diminishes relationship lending (F65) | less informed lending decisions (G21) |