Competition and bank stability

Martin R. Goetz

Journal of Financial Intermediation, 2018, vol. 35, issue PA, 57-69

Abstract: Does an increase in competition increase or decrease bank stability? I use a novel way to capture changes in banking competition by exploring how the exogenous state-specific process of banking deregulation gradually lowered entry barriers into urban banking markets. I find that the increase in market contestability significantly improves bank stability. This result is robust to the inclusion of additional fixed effects and other influences, such as mergers and acquisitions, or geographic expansion. Moreover, I find that greater competition reduces banks’ failure probability, share of non-performing loans and increases profitability. These findings suggest that competition increases stability, as it improves bank profitability and asset quality.

Keywords: Risk; Stability; Competition; Contestability; Entry; Lending (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (58)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:35:y:2018:i:pa:p:57-69

DOI: 10.1016/j.jfi.2017.06.001

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