Competition and risk-taking in investment banking

How does competition affect the investment banking business and the risks individual institutions are exposed to? Using a large sample of investment banks operating in seven developed economies over 1997-2014, we apply a panel VAR model to examine the relationships between competition and risk without assuming any a priori restrictions. Our main finding is that investment banks’ higher risk exposure, measured as a long-term capital-at-risk and return volatility, was facilitated by greater competitive pressures for both boutique investment banks and full service investment banks. Overall, we find some evidence that more competition leads to more fragility before and during the recent financial crisis.

This is the peer reviewed version of the following article: Degl'Innocenti, M, Fiordelisi, F, Girardone, C, Radić, N. Competition and risk‐taking in investment banking. Financial Markets, Inst. & Inst. 2019; 28: 241– 260, which has been published in final form at https://doi.org/10.1111/fmii.12113. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.

Special Issue: 2016 Portsmouth – Fordham Conference on Banking and Finance