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Bank Competition: Measurement, Decision‐Making, and Risk‐Taking

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  • ROBERT M. BUSHMAN
  • BRADLEY E. HENDRICKS
  • CHRISTOPHER D. WILLIAMS
Abstract
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.

Suggested Citation

  • Robert M. Bushman & Bradley E. Hendricks & Christopher D. Williams, 2016. "Bank Competition: Measurement, Decision‐Making, and Risk‐Taking," Journal of Accounting Research, Wiley Blackwell, vol. 54(3), pages 777-826, June.
    • Handle: RePEc:bla:joares:v:54:y:2016:i:3:p:777-826
    DOI: 10.1111/1475-679X.12117
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    References listed on IDEAS

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