Does More Competition Make Bank Riskier?

Abstract

Motivated by the debate－ Does more competition make banking more dangerous? － organized by The Economist in June 2011 this study investigates the effect of competition on bank risk-taking for a sample of commercial banks in the United States from 2000 to 2013 Our results indicate that the commercial banking industry in the United States exists in a state between perfect competition and monopolistic competition Moreover a higher degree of competition in this industry is associated with higher asset risk greater profitability volatility and more insolvency risk The risk-taking behaviors of banks are procyclical and the increases in asset risk and bankruptcy risk due to competition during the global financial crises that started in 2008 are lower than those in the overall period which is intuitive as banks are expected to become more conservative during financial crises The results also show that larger banks in more competitive markets tend to take more risks and this might result from the moral hazard with regard to being seen as “too big to fail” However banks with a high capital ratio in highly competitive markets have lower asset risk profitability volatility and risk of bankruptcy which suggests that capitalization has a positive impact on financial stability Overall this study has policy implications with regard to the role of the lender of last resort and provides a benchmark for policy makers regarding bank capitalization

Date of Award	2015 Jul 20
Original language	English
Supervisor	Tse-Shih Wang (Supervisor)