The link between bank competition and risk in the United Kingdom: two views for policymaking

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 04 September 2020

Staff Working Paper No. 885

Sebastian J A de-Ramon, William B Francis and Michael Straughan

We use quantile regression to examine the links between competition and firm-level solvency risk for all banks and building societies in the United Kingdom between 1994 and 2013. Quantile regression provides a finer picture of the relationship (as compared with standard regression techniques) across institutions ranked according to how close each is to insolvency. We find that for domestic banks and building societies already close to insolvency the association is favourable, suggesting that risk decreases (increases) with more (less) competition. For foreign-owned banks and for relatively healthy building societies farther from insolvency we find the opposite, indicating that risk increases (decreases) with more (less) competition. We find that regulation is effective in moderating adverse links between risk and competition. Our results highlight real differences in the links between competition and risk at the individual level that are useful for assessing the link at the system-wide level.

PDFThe link between bank competition and risk in the United Kingdom: two views for policymaking

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