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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 ,
Lynn Li ,
Jeffrey Ng  and
Tjomme O. Rusticus
Brian Akins
Affiliation:
[email protected], Rice University, Jones Graduate School of Business, Houston, TX 77005
Lynn Li
Affiliation:
[email protected], Boston University, Questrom School of Business, Boston, MA 02215
Jeffrey Ng
Affiliation:
[email protected], Singapore Management University, School of Accountancy, Singapore 178900, Singapore
Tjomme O. Rusticus*
Affiliation:
[email protected], London Business School, London NW1 4SA, United Kingdom.
*
*Corresponding author: [email protected]
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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
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 1 , February 2016 , pp. 1 - 28
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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