Skip to main content Accessibility help
×
Home

Bank Competition and Financial Stability: Evidence from the Financial Crisis

Published online by Cambridge University Press:  12 April 2016

Brian Akins
Affiliation:
akins@rice.edu, Rice University, Jones Graduate School of Business, Houston, TX 77005
Lynn Li
Affiliation:
lynnli@bu.edu, Boston University, Questrom School of Business, Boston, MA 02215
Jeffrey Ng
Affiliation:
jeffreyng@smu.edu.sg, Singapore Management University, School of Accountancy, Singapore 178900, Singapore
Tjomme O. Rusticus
Affiliation:
trusticus@london.edu, London Business School, London NW1 4SA, United Kingdom.
Rights & Permissions[Opens in a new window]

Abstract

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
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), 361388.CrossRefGoogle Scholar
Beck, T; De Jonghe, O.; and Schepens, G.. “Bank Competition and Stability: Cross-Country Heterogeneity.” Journal of Financial Intermediation, 22 (2013), 218244.CrossRefGoogle Scholar
Beck, T.; Demirgüç-Kunt, A.; and Levine, R.. “Bank Concentration, Competition, and Crises: First Results.” Journal of Banking and Finance, 30 (2006), 15811603.CrossRefGoogle Scholar
Berger, A. N.; Klapper, L. F.; and Turk-Ariss, R.. “Bank Competition and Financial Stability.” Journal of Financial Services Research, 35 (2009), 99118.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).
Boyd, J. H., and De Nicoló, G.. “The Theory of Bank Risk Taking and Competition Revisited.” Journal of Finance, 60 (2005), 13291343.CrossRefGoogle 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).
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).
Canner, G. B., and Smith, D. S.. “Home Mortgage Disclosure Act: Expanded Data on Residential Lending.” Federal Reserve Bulletin, 77 (1991), 859881.Google Scholar
Claessens, S., and Laeven, L.. “What Drives Bank Competition? Some International Evidence.” Journal of Money, Credit, and Banking, 36 (2004), 563583.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), 173217.CrossRefGoogle 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), 114.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), 509527.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), 567701.CrossRefGoogle 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), 495539.CrossRefGoogle Scholar
Ghent, A. C., and Kudlyak, M.. “Recourse and Residential Mortgage Default: Evidence from U.S. States.” Review of Financial Studies, 24 (2011), 31393186.CrossRefGoogle 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), 12471278.CrossRefGoogle 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), 147165.CrossRefGoogle Scholar
Hill, J. A. “Bank Capital Regulation by Enforcement: An Empirical Study.” Indiana Law Journal, 87 (2011), 645708.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), 485512.CrossRefGoogle Scholar
Jayaratne, J., and Strahan, P. E.. “The Finance-Growth Nexus: Evidence from Bank Branch Deregulation.” Quarterly Journal of Economics, 101 (1996), 639670.CrossRefGoogle 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), 298319.CrossRefGoogle Scholar
Keeley, M. “Deposit Insurance, Risk and Market Power in Banking.” American Economic Review, 80 (1990), 11831200.Google Scholar
Martinez-Miera, D. S., and Repullo, R.. “Does Competition Reduce the Risk of Bank Failure?” Review of Financial Studies, 23 (2010), 36383664.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), 2553.Google Scholar
Panzar, J. C., and Rosse, J. N.. “Testing for ‘Monopoly’ Equilibrium.” Journal of Industrial Economics, 35 (1987), 443456.CrossRefGoogle Scholar
Peek, J., and Rosengren, E.. “Bank Regulation and the Credit Crunch.” Journal of Banking and Finance, 19 (1995), 679692.CrossRefGoogle Scholar
Petersen, M., and Rajan, R.. “The Effect of Credit Market Competition on Lending Relationships.” Quarterly Journal of Economics, 110 (1995), 407443.CrossRefGoogle Scholar
Repullo, R. “Capital Requirements, Market Power, and Risk-Taking in Banking.” Journal of Financial Intermediation, 13 (2004), 156182.CrossRefGoogle Scholar
Schaeck, K.; Cihak, M.; and Wolfe, S.. “Are Competitive Banking Systems More Stable?” Journal of Money, Credit and Banking, 41 (2009), 711734.CrossRefGoogle Scholar
Stiglitz, J., and Weiss, A.. “Credit Rationing in Markets with Imperfect Competition.” American Economic Review, 71 (1981), 393410.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).
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).
Zarutskie, R. “Evidence on the Effect of Bank Competition on Firm Borrowing and Investment.” Journal of Financial Economics, 81 (2006), 503537.CrossRefGoogle Scholar

Full text views

Full text views reflects PDF downloads, PDFs sent to Google Drive, Dropbox and Kindle and HTML full text views.

Total number of HTML views: 20
Total number of PDF views: 4486 *
View data table for this chart

* Views captured on Cambridge Core between September 2016 - 20th January 2021. This data will be updated every 24 hours.

Access
Hostname: page-component-76cb886bbf-m9qpn Total loading time: 0.271 Render date: 2021-01-20T00:12:23.676Z Query parameters: { "hasAccess": "1", "openAccess": "0", "isLogged": "0", "lang": "en" } Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "metricsAbstractViews": false, "figures": false, "newCiteModal": false }

Send article to Kindle

To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Bank Competition and Financial Stability: Evidence from the Financial Crisis
Available formats
×

Send article to Dropbox

To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

Bank Competition and Financial Stability: Evidence from the Financial Crisis
Available formats
×

Send article to Google Drive

To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

Bank Competition and Financial Stability: Evidence from the Financial Crisis
Available formats
×
×

Reply to: Submit a response


Your details


Conflicting interests

Do you have any conflicting interests? *