Competition and Risk in Investment Banking

The recent financial crisis has shown that the stability of the investment banking industry plays a key role for the soundness of the financial system as a whole. Do high competition and/or cost inefficiencies increase investment banks’ insolvency (and capital) risks? Or, conversely, do investment banks’ insolvency risk and capitalization levels lead to higher price competition and/or lower cost efficiencies? Using a large sample of investment banks in ten large developed countries over 2000-2008, we show that price competition is rather limited in investment banking worldwide.
Although investment banks’ stability was granted by relatively low competitive pressures, banks
appeared prone to take more risk thus giving some support to the competition-stability view for the
investment banking industry.