The effect of competition on non-performing loan rates - evidence from the Norwegian banking market

Abstract

The relationship between bank competition and financial stability has been thoroughly debated over the last decades. The importance of a stable banking system for financial stability makes this a topic of interest for both economists and regulators.

Using accounting data for Norwegian banks over the last 20 years, we assess the relationship between the rate of non-performing loans and different measures of competition. We find a non-linear relationship between market concentration and loan risk. For low levels of concentration, increased concentration reduces non-performing loan rates. Past a certain level of concentration, this relationship is reversed. Our findings indicate that the Norwegian banking market today is close to this optimal level, suggesting that a continued increasing trend in concentration will contribute to higher non-performing loan rates.