Abstract
Bank competition can induce excessive risk taking due to risk shifting. With a competitive banking sector and insured deposits, banks may have the incentive to overly invest in risky assets. I test this hypothesis using micro-level U.S. mortgage data by exploiting an exogenous land-topology-based variation in local house price volatility. I find that, from 2000 to 2005, banks faced with competitive county-level mortgage markets substantially lowered lending standards by twice as much as those in concentrated markets in response to high volatility in the house price, making their mortgage loan performance more volatile and correlated with future house price movements. Such risk taking pattern related to competition was associated with real economic consequences in the aftermath of the crisis, including 1% higher foreclosure rate and 1.5% higher real-sector unemployment rate for each one standard-deviation increase in local house price volatility.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
