How does bank competition affect credit risk? Evidence from loan-level data

Abstract

This paper studies how loan credit risk depends on competition in the banking sector. We estimate an empirical model of credit risk using data from the Spanish Credit Register on individual loans to non-financial firms in 1992–2007. Our results show that credit risk decreases with the level of competition in the credit market, and they are consistent with the prediction from the moral hazard view on the determinants of credit risk. We also find that the probability of loan default varies with characteristics of the bank, the local market and macro variables.