Bank Competition: Measurement, Decision‐Making, and Risk‐Taking

Robert M. Bushman, Bradley E. Hendricks and Christopher D. Williams

Journal of Accounting Research, 2016, vol. 54, issue 3, 777-826

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.

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:bla:joares:v:54:y:2016:i:3:p:777-826

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