Competition and the Riskiness of Banks' Loan Portfolios Competition and the riskiness of banks' loan portfolios 

Øivind Nilsen, Lars Sørgard, Kristin Heimdal, Kristoffer Solberg, Øivind Nilsen, Lars Sørgard, Kristin Heimdal, Kristoffer Solberg
2016 unpublished
How does competition in the banking market affect the risk-exposure of the banks' loan portfolios? From a theoretical model we predict that dampened competition may give the banks incentives to accept more borrowers and thereby to take a larger risk on its portfolio. Using a panel of accounting data for Norwegian banks over the last 20 years, the relationship between the rate of non-performing loans and different measures of competition is analysed. We find a U-shaped relationship between
more » ... nship between concentration and non-performing loan rates (decreasing and then increasing). The findings suggest that a continued increasing trend in concentration contributes to higher non-performing loan rates. Similar results are found when using interest margin as the measure of the toughness of competition.