Bank Competition, Risk Taking, and their Consequences: Evidence from the U.S. Mortgage and Labor Markets
IMF Working Papers, July 6, 2018
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- Bank Competition, Risk Taking, and their Consequences: Evidence from the U.S. Mortgage and Labor Markets
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Bibliographic details
- Authors: Alan Xiaochen Feng
- Published: July 6, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484364024.001
Summary and main findings
- Bank competition can induce excessive risk taking due to risk shifting.
- Using micro-level U.S. mortgage data and exploiting exogenous variation in local house price volatility, the paper tests this hypothesis.
- The paper finds that, in response to high expected house price volatility, banks in U.S. counties with a competitive mortgage market lowered lending standards by "twice as much" as those with concentrated markets between 2000 and 2005.
- This pattern of risk taking was associated with real economic outcomes during the financial crisis, including higher unemployment rates in local real sectors.
Data, scope, and methodology (as described)
- Empirical approach exploits exogenous variation in local house price volatility.
- Micro-level U.S. mortgage data are the primary data source.
- Time period emphasized: between 2000 and 2005.
Policy-relevant implications and consequences
- Increased competition in mortgage markets can amplify risk shifting incentives for banks, particularly where house price volatility is high.
- Areas with competitive mortgage markets facing high expected house price volatility experienced larger loosening of lending standards, with measurable adverse real-sector outcomes during the financial crisis (higher local unemployment).
Publication and metadata
- Author: Alan Xiaochen Feng
- Publication date: July 6, 2018
- Series: IMF Working Papers; Working Paper No. 2018/157; Issue: 157; Volume: 2018
- Pages: 46
- DOI: https://doi.org/10.5089/9781484364024.001
- Stock No: WPIEA2018157
- ISBN: 9781484364024
- ISSN: 1018-5941
- Subjects and keywords: Banking; Competition; Financial institutions; Financial markets; Housing; Housing prices; Loans; Mortgages; National accounts; Prices; bank competition; bank concentration; bank-competition-instability relationship; Competition; Herfindahl index; house price volatility; Housing; mortgage market; mortgage portfolio; risk taking; unemployment; WP
Source: IMF Working Paper "Bank Competition, Risk Taking, and their Consequences: Evidence from the U.S. Mortgage and Labor Markets" by Alan Xiaochen Feng, July 6, 2018.