Journal of Risk

Banking competition and systemic risk: evidence from China

Jiawei Guo and Jiwen Chai

  • Our conclusion supports the competition-stability hypothesis, where an increase in bank competition is accompanied by a significant decrease in systemic risk levels.
  • Competition mainly reduces the externalities of risk spillovers by enhancing the bank’s risk awareness, improving the bank’s asset quality, increasing operating efficiency, and reducing the fluctuation of earnings.
  • A certain degree of orderly competition is conducive to the overall stability of the banking industry.

Based on data from 2008 to 2022 Q2, this paper examines the relationship between competition between China’s banks and the stability of the banking system. The impact of individual banks on the banking system is measured by the systemic conditional value-at-risk (CoVaR). This paper concludes that the increase in the level of bank competition is accompanied by a decrease in the level of systemic risk, and thus supports the competition stability hypothesis. Further, competition mainly reduces the externalities of risk spillovers by enhancing a bank’s risk awareness, improving its asset quality and its operating efficiency, and reducing any fluctuation in earnings. During the Covid-19 pandemic, the system stability effect of competition was most significant in large-scale commercial banks, such as state-owned commercial banks. This study provides empirical evidence for easing the entry restrictions of commercial banks and promoting the orderly opening and competition of new commercial banks.

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