Banking Deregulation and Credit Risk: Evidence from the EU

Journal of Financial Stability 2 (4): 356–390. 2007. DOI: 10.1016/j.jfs.2006.11.002

34 Pages Posted: 19 Jun 2017 Last revised: 20 Nov 2017

See all articles by Xiaofen Chen

Xiaofen Chen

Truman State University - Department of Economics

Date Written: 2007

Abstract

This paper studies the effect of banking deregulation on credit risk. Its theoretical model shows that a bank is willing to invest more resources in screening borrowers when there is an entry threat, even though loan rates are driven lower. Thus, deregulation may result in improved loan quality and lower credit risk. This result is tested using bank-level balance sheet data and macroeconomic data for the European Union. The data reveal that competition intensified after the completion of the Second Banking Directive, while loan quality improved in most markets. Evidence is found that the loan quality improvement is associated with lower interest margin.

Keywords: Banking deregulation, Credit risk, Banking competition, European Union

JEL Classification: G2, L1

Suggested Citation

Chen, Xiaofen, Banking Deregulation and Credit Risk: Evidence from the EU (2007). Journal of Financial Stability 2 (4): 356–390. 2007. DOI: 10.1016/j.jfs.2006.11.002, Available at SSRN: https://ssrn.com/abstract=2988352

Xiaofen Chen (Contact Author)

Truman State University - Department of Economics ( email )

100 E. Normal Street
Kirksville, MO 63501
United States
660-785-4644 (Phone)
660-785-4337 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
21
Abstract Views
215
PlumX Metrics