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Bank Competition and Financial Stability: Evidence from the Financial Crisis

Published online by Cambridge University Press:  12 April 2016

Brian Akins
Affiliation:
akins@rice.edu, Rice University, Jones Graduate School of Business, Houston, TX 77005
Lynn Li
Affiliation:
lynnli@bu.edu, Boston University, Questrom School of Business, Boston, MA 02215
Jeffrey Ng
Affiliation:
jeffreyng@smu.edu.sg, Singapore Management University, School of Accountancy, Singapore 178900, Singapore
Tjomme O. Rusticus*
Affiliation:
trusticus@london.edu, London Business School, London NW1 4SA, United Kingdom.
*
*Corresponding author: trusticus@london.edu
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Abstract

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We examine the link between bank competition and financial stability using the recent financial crisis as the setting. We utilize variation in banking competition at the state level and find that banks facing less competition are more likely to engage in risky activities, more likely to face regulatory intervention, and more likely to fail. Focusing on the real estate market, we find that states with less competition had higher rates of mortgage approval, experienced greater inflation in housing prices before the crisis, and experienced a steeper decline in housing prices during the crisis. Overall, our study is consistent with greater competition increasing financial stability.

Type
Research Articles
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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