This paper assesses the impact of bank specialisation and business models on
the relationship between competition and risk. We tested the non-linear
relationship between bank competition and risk on an extensive sample of
5,119 European banks active during 2000-2018, using system GMM. The results
confirmed the nonlinear relationship between competition and risk-taking.
Cooperatives are better protected against liquidity risks and are more
stable. Well-diversified banking entities take more risks than their
counterparts, whereas larger institutions have a lower risk appetite and a
higher exposure to liquidity shocks. Future regulations should consider
different risk strategies to make them more efficient and to generate the
expected outcomes. The most recent regulatory developments have reduced the
risk appetite of large financial institutions. Lastly, it is critical that
regulators monitor M&A activity and ensure the optimal competition level.
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