A recent Bank of England working paper highlights the link between banking market competition and financial system stability. Consistent with earlier work, it highlights that as competition increases, the banking system overall responds typically by moving to higher risk lending. However, in addition, it describes how individual banks tend to converge with the most-risky becoming more secure as competition increases.
We’ve got quite used to hearing the misery and bad news associated with UK banks since the financial crisis, yet one of the positive sides to this debate has been the rise of the challenger banks. These secondary players have grown quickly, with several listing last year as the sector continues to attract both customer and investor interest. The challenger banks have also long been praised by some politicians as being responsible for injecting much-needed further competition into the UK banking sector.