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Does Competition Affect Bank Risk?

Listed author(s):
  • Liangliang Jiang
  • Ross Levine
  • Chen Lin

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23080.

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Date of creation: Jan 2017
Handle: RePEc:nbr:nberwo:23080
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