Financial Liberalization, Competition and Sound Banking: Theoretical and Empirical Essays

Previous studies seem to agree that increased competition would cause riskier banking behavior. This dissertation shows that when competition intensifies, banks have greater incentives for screening loan applicants, and thus loan quality may improve. In addition, competition fosters banks to rely less on collateral requirements. Hence, banks may be less vulnerable to asset price shocks. The empirical chapter finds evidence of loan quality improvement after removing cross-border entry restrictions in the EU. There is also evidence that banks' behavior across EU countries has converged.