Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 10/2023: Competition and risk taking in local bank markets: evidence from the business loans segment

Chiara Canta (), Øivind A. Nilsen () and Simen A. Ulsaker ()
Additional contact information
Chiara Canta: TBS Business School
Øivind A. Nilsen: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH, Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Simen A. Ulsaker: Telenor Research

Abstract: This paper studies empirically the relationship between competition and risk taking in banking markets. We exploit an unique dataset providing information about all bank loans to Norwegian firms over several years. Rather than relying on observed market shares, we use the distance between bank branches and firms to measure the competitiveness of local markets. The cross-sectional and longitudinal variation in competition in local markets are used to identify the relationship between competition and risk taking, which we measure by the non-performing loans and loss provision rates of the individual banks. We find that more competition leads to more risk taking. We also examine the effects of bank competition on the availability of loans. More competition leads to lower interest rates and higher loan volumes, but also makes it more difficult for small and newly established firms to obtain a loan.

Keywords: Competition; risk

JEL-codes: G21; L11; L13

Language: English

45 pages, May 18, 2023

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