Market Competition and Bank Capital

• Applicant: Professorin H. Özlem Dursun-de Neef, Ph.D.
• Subject Area: Accounting and Finance
• Term: from 2020 to 2023
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 448659867

• Final Report Year: 2023

Final Report Abstract

In summary, in this project, we focus on the credit market competition, bank’s capitalization and financial stability. Three research articles have been written as part of the project. In the first article “Credit market competition and bank capitalization”, we study the impact of a change in competition on banks’ capitalization. Our results show that the impact of increased competition on stability varies across banks with different market shares. We find that an increase in competition leads to less stability for large market share banks by increasing their risk taking and decreasing their capital ratios (“competition-fragility” view). On the other hand, increased competition leads to more stability for small market share banks by decreasing their risk taking and increasing their capitalization (“competition-stability” view). In the second article “Countercyclical capital buffers and credit supply: Evidence from the COVID-19 crisis”, we analyze the effectiveness of countercyclical capital buffer releases during the pandemic. Our results show that the release of the CCyBs helped banks to provide more loans during the pandemic. Our findings highlight that the timing matters crucially: Policy-makers should not release buffers “too late” as this could potentially outweigh any support for credit supply given the strong negative effect of the high CCyBs when entering the pandemic. In the third article “How did banks’ ESG conduct affect financial performance and lending during COVID-19?”, we examine the link between banks’ ESG conduct and their financial performance during the pandemic. The findings of this paper suggest that the COVID-19 shock had a significant negative impact on the financial performance of high-ESG banks, which in turn seem to have responded by reducing their lending in this period. This negative impact of the ESG conduct during the crisis is relatively more pronounced for banks with a higher share of retail investors, who are financially more constrained than institutional investors.

Publications

• Credit Market Competition and Bank Capitalization. SSRN Electronic Journal.
  Dursun-de, Neef Özlem & Gehrig, Thomas
  
• How Did Banks' ESG Conduct Affect Financial Performance and Lending During COVID-19?. SSRN Electronic Journal.
  Dursun-de, Neef H. Özlem; Forchieri, Joaquin; Gehrig, Thomas & Schandlbauer, Alexander