Competition and Bank Risk: Evidence from Geographic Bank Deregulation

Abstract

We examine the effects of competition on bank risk. We find strong evidence that interstate banking deregulation — which generally increases bank competition — is associated with lower bank risk and some evidence intrastate branching increases bank risk. Further, interstate banking reduces bank risk more in sparsely populated states. Additional analyses suggest that in contrast to previous studies that focus on large banks, the impact of interstate banking deregulation on bank risk is driven by small banks, with strong small banks having lower risk after interstate banking. However, intrastate branching deregulation is associated with higher risk for small and medium banks.