Hostname: page-component-586b7cd67f-g8jcs Total loading time: 0 Render date: 2024-12-04T20:03:42.708Z Has data issue: false hasContentIssue false
  • English
  • Français

Bank Competition and Financial Stability: Evidence from the Financial Crisis

Published online by Cambridge University Press:  12 April 2016

Brian Akins ,
Lynn Li ,
Jeffrey Ng  and
Tjomme O. Rusticus
Brian Akins
Affiliation:
[email protected], Rice University, Jones Graduate School of Business, Houston, TX 77005
Lynn Li
Affiliation:
[email protected], Boston University, Questrom School of Business, Boston, MA 02215
Jeffrey Ng
Affiliation:
[email protected], Singapore Management University, School of Accountancy, Singapore 178900, Singapore
Tjomme O. Rusticus*
Affiliation:
[email protected], London Business School, London NW1 4SA, United Kingdom.
*
*Corresponding author: [email protected]
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We examine the link between bank competition and financial stability using the recent financial crisis as the setting. We utilize variation in banking competition at the state level and find that banks facing less competition are more likely to engage in risky activities, more likely to face regulatory intervention, and more likely to fail. Focusing on the real estate market, we find that states with less competition had higher rates of mortgage approval, experienced greater inflation in housing prices before the crisis, and experienced a steeper decline in housing prices during the crisis. Overall, our study is consistent with greater competition increasing financial stability.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 1 , February 2016 , pp. 1 - 28
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

References

Allen, F., and Gale, D.. Comparing Financial Systems. Cambridge, MA: MIT Press (2000).Google Scholar
Barth, J. R.; Lin, C.; Lin, P.; and Song, F. M.. “Corruption in Bank Lending to Firms: Cross-Country Micro Evidence on the Beneficial Role of Competition and Information Sharing.” Journal of Financial Economics, 91 (2009), 361–388.Google Scholar
Beck, T; De Jonghe, O.; and Schepens, G.. “Bank Competition and Stability: Cross-Country Heterogeneity.” Journal of Financial Intermediation, 22 (2013), 218–244.Google Scholar
Beck, T.; Demirgüç-Kunt, A.; and Levine, R.. “Bank Concentration, Competition, and Crises: First Results.” Journal of Banking and Finance, 30 (2006), 1581–1603.Google Scholar
Berger, A. N.; Klapper, L. F.; and Turk-Ariss, R.. “Bank Competition and Financial Stability.” Journal of Financial Services Research, 35 (2009), 99–118.CrossRefGoogle Scholar
Bergstresser, D. “Banking Market Concentration and Consumer Credit Constraints: Evidence from the 1983 Survey of Consumer Finances.” Working Paper, Harvard Business School (2010).Google Scholar
Boyd, J. H., and De Nicoló, G.. “The Theory of Bank Risk Taking and Competition Revisited.” Journal of Finance, 60 (2005), 1329–1343.Google Scholar
Boyd, J. H.; De Nicoló, G.; and Jalal, A. M.. “Bank Competition, Risk and Asset Allocations.” International Monetary Fund Working Paper 09/143 (2009).Google Scholar
Boyd, J. H.; De Nicoló, G.; and Jalal, A. M.. “Bank Competition, Asset Allocations and Risk of Failure: An Empirical Investigation.” CESifo Working Paper Series No. 3198, University of Minnesota (2010).CrossRefGoogle Scholar
Canner, G. B., and Smith, D. S.. “Home Mortgage Disclosure Act: Expanded Data on Residential Lending.” Federal Reserve Bulletin, 77 (1991), 859–881.Google Scholar
Claessens, S., and Laeven, L.. “What Drives Bank Competition? Some International Evidence.” Journal of Money, Credit, and Banking, 36 (2004), 563–583.CrossRefGoogle Scholar
De Nicoló, G.; Bartholomew, P.; Zaman, J.; and Zephirin, M.. “Bank Consolidation, Internationalization, and Conglomeration: Trends and Implications for Financial Risk.” Financial Markets, Institutions and Instruments, 13 (2004), 173–217.Google Scholar
Demsetz, R. S.; Saidenberg, M. R.; and Strahan, P. E.. “Banks with Something to Lose: The Disciplinary Role of Franchise Value.” Federal Reserve Bank of New York Economic Policy Review, 2 (1996), 1–14.Google Scholar
Galloway, T. M.; Lee, W. B.; and Roden, D. M.. “Banks’ Changing Incentives and Opportunities for Risk Taking.” Journal of Banking and Finance, 21 (1997), 509–527.CrossRefGoogle Scholar
Gan, J. “Banking Market Structure and Financial Stability: Evidence from the Texas Real Estate Crisis in the 1980s.” Journal of Financial Economics, 73 (2004), 567–701.Google Scholar
Garmaise, M., and Moskowitz, T. J.. “Bank Mergers and Crime: The Real and Social Effects of Credit Market Competition.” Journal of Finance, 61 (2006), 495–539.Google Scholar
Ghent, A. C., and Kudlyak, M.. “Recourse and Residential Mortgage Default: Evidence from U.S. States.” Review of Financial Studies, 24 (2011), 3139–3186.Google Scholar
Hao, L.; Nandy, D. K.; and Roberts, G. S.. “Effects of Bank Regulation and Lender Location on Loan Spreads.” Journal of Financial and Quantitative Analysis, 47 (2012), 1247–1278.Google Scholar
Hellmann, T.; Murdock, K.; and Stiglitz, J.. “Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?” American Economic Review, 90 (2000), 147–165.Google Scholar
Hill, J. A. “Bank Capital Regulation by Enforcement: An Empirical Study.” Indiana Law Journal, 87 (2011), 645–708.Google Scholar
Houston, J. F.; Lin, C.; Lin, P.; and Ma, Y.. “Credit Rights, Information Sharing, and Bank Risk Taking.” Journal of Financial Economics, 96 (2010), 485–512.Google Scholar
Jayaratne, J., and Strahan, P. E.. “The Finance-Growth Nexus: Evidence from Bank Branch Deregulation.” Quarterly Journal of Economics, 101 (1996), 639–670.Google Scholar
Jordan, J. S.; Peek, J.; and Rosengren, E. S.. “The Market Reaction to the Disclosure of Supervisory Actions: Implications for Bank Transparency.” Journal of Financial Intermediation, 9 (2000), 298–319.CrossRefGoogle Scholar
Keeley, M. “Deposit Insurance, Risk and Market Power in Banking.” American Economic Review, 80 (1990), 1183–1200.Google Scholar
Martinez-Miera, D. S., and Repullo, R.. “Does Competition Reduce the Risk of Bank Failure?” Review of Financial Studies, 23 (2010), 3638–3664.CrossRefGoogle Scholar
Munnell, A. H.; Tootell, G. M. B.; Browne, L. E.; and McEneaney, J.. “Mortgage Lending in Boston: Interpreting HMDA Data.” American Economic Review, 86 (1996), 25–53.Google Scholar
Panzar, J. C., and Rosse, J. N.. “Testing for ‘Monopoly’ Equilibrium.” Journal of Industrial Economics, 35 (1987), 443–456.Google Scholar
Peek, J., and Rosengren, E.. “Bank Regulation and the Credit Crunch.” Journal of Banking and Finance, 19 (1995), 679–692.CrossRefGoogle Scholar
Petersen, M., and Rajan, R.. “The Effect of Credit Market Competition on Lending Relationships.” Quarterly Journal of Economics, 110 (1995), 407–443.Google Scholar
Repullo, R. “Capital Requirements, Market Power, and Risk-Taking in Banking.” Journal of Financial Intermediation, 13 (2004), 156–182.Google Scholar
Schaeck, K.; Cihak, M.; and Wolfe, S.. “Are Competitive Banking Systems More Stable?” Journal of Money, Credit and Banking, 41 (2009), 711–734.Google Scholar
Stiglitz, J., and Weiss, A.. “Credit Rationing in Markets with Imperfect Competition.” American Economic Review, 71 (1981), 393–410.Google Scholar
U.S. Department of Justice. “Bank Merger Competitive Review—Introduction and Overview.” Available at http://www.justice.gov/atr/public/guidelines/6472.htm (1995).Google Scholar
U.S. Department of Justice and the Federal Trade Commission. “Horizontal Merger Guidelines.” Available at http://www.justice.gov/atr/public/guidelines/hmg-2010.html (2010).Google Scholar
Zarutskie, R. “Evidence on the Effect of Bank Competition on Firm Borrowing and Investment.” Journal of Financial Economics, 81 (2006), 503–537.CrossRefGoogle Scholar