Procyclicality of Bank Growth and Competitive Environment Cross-country Evidence

Abstract

This paper attempts to find out what is the role of competitive environment
in shaping the sensitivity of growth in banking to the business cycle. To answer
this question, we apply a large set of individual bank level data including
over 8000 banks operating in more than 100 countries. This study uses
the growth of assets, loans, deposits and leverage as proxies of bank growth
and Lerner index as a proxy for the competitive environment. The analysis
shows that decreased competition is associated with increased procyclicality
of bank growth. However, in a perfectly competitive environment the growth
turns out to be countercyclical. This effect differs between high- and lowincome countries. A perfectly competitive environment is associated with
countercyclical growth in high-income countries. The opposite result is found
for low-income countries. Our results for Central Eastern European countries
show that increased competition is associated with enhanced procyclicality of
growth.