Exploring short‐ and long‐run links from bank competition to risk

The current literature offers diverse findings on the bank competition‐risk relationship. We seek to advance understanding by looking at both short‐ and long‐run relationships for banks from 27 EU countries, using a six‐year period before and since 2007 and employing both the H‐statistic and the Lerner index as measures of competition. We thus highlight further nuances in the competition–risk relationship that are absent from the current literature. Both measures have a positive short‐run relationship with risk, while long‐run effects differ. Underlying this, the competition measures differ in their relationship to the volatility of profits, with important policy implications.