Bank Competition, Risk Taking, and their Consequences: Evidence from the U.S. Mortgage and Labor Markets

Alan Xiaochen Feng

No 2018/157, IMF Working Papers from International Monetary Fund

Abstract: Bank competition can induce excessive risk taking due to risk shifting. This paper tests this hypothesis using micro-level U.S. mortgage data by exploiting the exogenous variation in local house price volatility. The paper finds that, in response to high expected house price volatility, banks in U.S. counties with a competitive mortgage market lowered lending standards by twice as much as those with concentrated markets between 2000 and 2005. Such risk taking pattern was associated with real economic outcomes during the financial crisis, including higher unemployment rates in local real sectors.

Keywords: WP; house price volatility; bank competition; mortgage market; mortgage portfolio; risk taking; unemployment; bank concentration; Herfindahl index; bank-competition-instability relationship; Housing prices; Mortgages; Competition; Housing; Loans (search for similar items in EconPapers)
Pages: 46
Date: 2018-07-06
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Citations: View citations in EconPapers (3)

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