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Bank Competition: Measurement, Decision‐Making, and Risk‐Taking
Author(s) -
BUSHMAN ROBERT M.,
HENDRICKS BRADLEY E.,
WILLIAMS CHRISTOPHER D.
Publication year - 2016
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.12117
Subject(s) - downside risk , competition (biology) , loan , business , equity (law) , forbearance , deregulation , systemic risk , underwriting , revenue , financial risk management , monetary economics , economics , risk management , financial system , actuarial science , financial crisis , finance , portfolio , ecology , macroeconomics , political science , law , biology
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.