Bank Competition, Risk Taking, and their Consequences: Evidence from the U.S. Mortgage and Labor Markets

July 6, 2018

Preview Citation

Format: Chicago

Alan Xiaochen Feng. Bank Competition, Risk Taking, and their Consequences: Evidence from the U.S. Mortgage and Labor Markets, (USA: International Monetary Fund, 2018) accessed November 18, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Bank competition can induce excessive risk taking due to risk shifting. This paper tests this hypothesis using micro-level U.S. mortgage data by exploiting the exogenous variation in local house price volatility. The paper finds that, in response to high expected house price volatility, banks in U.S. counties with a competitive mortgage market lowered lending standards by twice as much as those with concentrated markets between 2000 and 2005. Such risk taking pattern was associated with real economic outcomes during the financial crisis, including higher unemployment rates in local real sectors.

Subject: Banking, Competition, Financial institutions, Financial markets, Housing, Housing prices, Loans, Mortgages, National accounts, Prices

Keywords: Bank competition, Bank concentration, Bank-competition-instability relationship, Competition, Herfindahl index, House price volatility, Housing, Housing prices, Loans, Mortgage market, Mortgage portfolio, Mortgages, Risk taking, Unemployment, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/157
Stock No:

WPIEA2018157
ISBN:

9781484364024
ISSN:

1018-5941

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