Bank Risk and Competition: Evidence from Regional Banking Markets

Abstract

We investigate the bank competition-stability nexus based on a unique regulatory dataset. First, we use outright bank defaults, and control for a wide array of different time-varying bank characteristics which are likely to influence the nexus. Second, we simultaneously include measures of competition and market power corresponding to the bank, county, and federal state level. Third, we investigate the role of bank competition in the transmission of monetary policy to bank risk. From a policy perspective, our findings indicate that competition-reducing regulation does not necessarily enhance either the stability of individual banks or their resilience to monetary policy shocks.