Exploring Short- and Long-Run Links from Bank Competition to Risk

Abstract

The current literature offers diverse findings on the bank competition-risk relation. We seek to advance understanding by looking at both short- and long-run relations for banks from 27 EU countries, using a six-year period before and since 2007 and employing both the H-statistic and the Lerner index as measures of competition. We thus highlight further nuances in the competition–risk relation that are absent from the current literature. Both measures have a positive short-run relation with risk, while long-run effects differ. Underlying this, the competition measures differ in their relation to the volatility of profits, with important policy implications.