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 low-income 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.