Abstract
Although policymakers often discuss tradeoffs between competition and stability, past research provides differing theoretical perspectives and conflicting empirical results on whether competition destabilizes banks. In this paper, we employ a new approach for identifying exogenous changes in the competitive pressures facing individual banks and use this approach to assess the impact of competition on bank risk. We discover that an intensification of bank competition materially boosts bank risk. We also find suggestive evidence that this positive relationship is driven by reduced bank profit margins, lowered bank charter value, provision of nontraditional services, and diminished relationship lending.
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