Bank Competition and Risk-Taking Under Market Integration

Linkages between bank competition and risk-taking are analyzed in a model where market integration is the principal driver of increased competition. Risk implications of across-market competition under banking market integration are significantly different from that of within-market competition. Although both modes of competition increase the number of competitor banks, across-market competition yields a bank-customer effect that can potentially reverse any relation that prevails between within-market competition and risk-taking. This result suggests that the lack of consensus in the bank competition-financial stability literature is not an anomaly but an inherent feature of the analysis. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.03495 .