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Competition and bank systemic risk: New evidence from Japan's regional banking

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  • Hirata, Wataru
  • Ojima, Mayumi

Abstract

Bank competition and financial stability is a recurrent research issue, and researchers have begun to shed light on the effect of competition on systemic risk. In this paper, we first examine the empirical relationship between competition and systemic risk taking up the case of Japan's regional banking system. We find that competition undermines the system-wide financial stability. This result, however, sharply contrasts with those of earlier studies which utilize cross-country samples of large banking organizations. To this end, we perform a theoretical analysis focusing on the business profile of Japan's regional banks. We demonstrate that Japan's regional banks tend to diversify their portfolios toward non-core loans when the profitability of core loans declines as a result of competition. This diversification results in the build-up of systemic risk through increased common asset holdings.

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  • Hirata, Wataru & Ojima, Mayumi, 2020. "Competition and bank systemic risk: New evidence from Japan's regional banking," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:pacfin:v:60:y:2020:i:c:s0927538x1930589x
    DOI: 10.1016/j.pacfin.2020.101283
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    2. Baumöhl, Eduard & Bouri, Elie & Hoang, Thi-Hong-Van & Shahzad, Syed Jawad Hussain & Výrost, Tomáš, 2020. "Increasing systemic risk during the Covid-19 pandemic: A cross-quantilogram analysis of the banking sector," EconStor Preprints 222580, ZBW - Leibniz Information Centre for Economics.
    3. Bátiz-Zuk Enrique & Lara Sánchez José Luis, 2021. "Revisiting the link between systemic risk and competition based on network theory and interbank exposures," Working Papers 2021-26, Banco de México.
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    9. Ernaningsih, Indria & Smaoui, Houcem & Ben Salah, Ines, 2024. "Competition, regulation, and systemic risk in dual banking systems," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 1087-1103.
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    11. Bátiz-Zuk, Enrique & Lara-Sánchez, José Luis, 2023. "The impact of bank competition on contagion risk: The case of Mexico," Journal of Economics and Business, Elsevier, vol. 127(C).

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    More about this item

    Keywords

    Bank competition; Mark-up; Systemic-risk; Common asset holdings; Interconnectedness;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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