Branch Banking, Bank Competition, and Financial Stability

PurposeThe number of US commercial banks has declined by about 50% over the last two decades. This change could lead to a potential decline in competition and a potential increase in market power in the agricultural banking market. The focus of this study is to examine whether the risk of failure and the performance of agricultural banks has been affected by bank consolidations.Design/methodology/approachThe impact of bank competition on performance and financial stability of agricultural banks is studied using a Lerner index as a measure of market power. A Z-score is constructed to measure bank stability. Similarly, the return on assets (net income to total assets ratio), return on equity (net income to the total equity ratio), agricultural loan ratio and agricultural loan volume are used as performance measures for agricultural banks. Two-way fixed effect regression models are estimated to measure the impact of competition on financial stability and performance.FindingsResults indicate that bank competition has a U-shaped effect on the probability of default and an inverted U-shaped effect on volume and proportion of agricultural lending. There also exists evidence of a positive but non-linear effect of bank market power on the profitability of agricultural banks.Originality/valueThere is limited literature on the impact of bank competition on financial stability and performance of US agricultural banks. Agricultural banks hold more than 40% of US farm debt. A decrease in the number of banks or the level of competition in agricultural banking may cause an adverse effect on relationship lending. The key findings imply that bank regulatory strategies should focus on enhancing (reducing) competition in more (less) concentrated banking markets to improve the financial health and performance of agricultural banks.

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Capital requirement and financial stability

10.32469/10355/66199 ◽

2018 ◽

Author(s):

◽

Xingpeng Wei

Keyword(s):

Financial Stability ◽

Total Effect ◽

Capital Requirement ◽

Bank Competition ◽

University Of Missouri ◽

Bank Run ◽

Ex Ante ◽

The University ◽

Intensity Of Competition

[ACCESS RESTRICTED TO THE UNIVERSITY OF MISSOURI AT AUTHOR'S REQUEST.] This dissertation consists of two chapters. In the first chapter, I examine the tradeoff between bank competition and financial stability resulting from the capital requirement when an unexpected bank run may happen. Built on the framework of Diamond-Dybvig, the model shows that a higher capital requirement tightens banks' capacity for taking deposits, thus reducing the intensity of competition between banks and at the same time improving financial stability. However, the total effect of capital requirement on welfare is not monotone. The second chapter extends the work of the first chapter and shows that in an environment where run is expected ex ante, sufficient capital and optimally set capital requirement can still achieve first-best allocation, thus run probability will not matter if the capital requirement is optimally chosen. A bank's contracts in economies with different run probabilities are also examined.

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