Bank Competition and Financial Stability:Evidence from the U.S. Banking Deregulation

Yifei Cao (), Jenyu Chou (), Ian Gregory-Smith () and Alberto Montagnoli ()
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Yifei Cao: School of Economics, University of Nottingham Ningbo China
Jenyu Chou: School of Economics, University of Nottingham Ningbo China
Alberto Montagnoli: Department of Economics, University of Sheffield, UK

No 2020003, Working Papers from The University of Sheffield, Department of Economics

Abstract: This paper examines the causal relationship between banking competition and financial stability. We find that an exogenous competition shock significantly improved the stability of banks, consistent with the ‘competition-stability hypothesis’. We show that banks improved their cost efficiency and reduced credit risks in response to U.S. banking deregulation. In addition, we show the competition shock had a larger impact on banks who were initially operating in a less competitive environment. Our findings provide the first quasi-natural experimental evidence on the non-linear relationship between bank competition and financial stability.

Keywords: Bank Competition; Bank Risk; Financial Stability; Banking Deregulation (search for similar items in EconPapers)
JEL-codes: G18 G20 G21 G28 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2020-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-com and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:shf:wpaper:2020003

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