Bank Competition: Measurement,Decision‐Making,and Risk‐Taking |
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Authors: | ROBERT M BUSHMAN BRADLEY E HENDRICKS CHRISTOPHER D WILLIAMS |
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Institution: | 1. Kenan‐Flagler Business SchoolUniversity of North Carolina at Chapel Hill;2. Ross School of BusinessUniversity of Michigan |
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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. |
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Keywords: | G20 G21 L10 M40 M41 banking competition risk textual analysis |
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