Consequences of competition and proximity on the stability in banking : are there cyclical tendencies in risk taking, through distant lending, in the corporate loan market in Norway?

Abstract

In this thesis, we attempt to provide evidence on how competition in the corporate loan market in Norway affects banks´ risk taking, and hence the financial stability, through distant lending over the business cycle. We use comprehensive data from the Norwegian banking market, containing annual information on 169 banks and approximately 136 000 firms over the period 1997 to 2013. Our analysis provides ambiguous results on whether there is cyclical variation in lending distances, and collectively we cannot conclude that there is a clear relationship between business cycles and loan distances. Furthermore, we cannot conclude that increased lending distance is associated with increased risk. Since we do not find such a relationship, we do not consider it beneficial to run our last model investigating the effect of competition on banks´ risk taking, through distant lending. Regardless of whether increased competition leads to increased lending distances, it is not possible to measure whether competition affect banks’ risk taking, as we cannot use distance as an adequate proxy for the risk associated with a loan. Hence, we cannot conclude that competition in the Norwegian banking sector has a negative impact on financial stability through distant lending.