Monday, August 7, 2017
W. Blake Marsh, Federal Reserve Bank of Kansas City and Rajdeep Sengupta, Federal Reserve Bank of Kansas City examine Competition and Bank Fragility.
ABSTRACT:We present empirical evidence documenting how increased competition can affect the fragility of banks using U.S. banking data from 1990 to 2005. In particular, we find that local banks belonging to community (CBOs) and regional banking organizations (RBOs) increased their share of CRE loans as competition from large banking organizations (LBOs) increased. The paper traces the build-up in CRE concentrations in such local banks before the financial crisis to the expansions of LBO activity into local banking markets. After instrumenting for LBO entry into new markets, we find a steady and continuous increase in CRE loan shares at local banks. CRE concentrations were a principal cause of post-crisis bank failures, and this paper presents evidence showing how competition increases not just individual bank fragility, but the stability of the banking sector as a whole.