An analysis of contagion and competitive effects at commercial banks

Abstract

We examine whether an adverse event at one bank generates externalities for the banking industry, and assess whether the population of commercial banks is homogeneous. We find dividend reductions are negative events for both announcing money center and regional banks, but only reductions at money center banks have negative, contagion-type externalities. Dividend reductions at regional banks have positive competitive effects on geographic rivals. Regulatory enforcement actions induce negative valuation effects that are idiosyncratic to targeted banks, but actions against regional banks generate positive competitive effects on geographic rivals. Our evidence suggests that regional banking markets are not contestable.