Bank Competition and Stability in the United Kingdom

45 Pages Posted: 7 Aug 2018

See all articles by Sebastian de-Ramon

Sebastian de-Ramon

Bank of England; Bank of England - Prudential Regulation Authority; Cambridge Econometrics

William Francis

Bank of England

Michael Straughan

Bank of England - Prudential Regulation Authority; Bank of England

Date Written: August 3, 2018

Abstract

This paper examines the effects of competition on bank stability in the United Kingdom between 1994 and 2013. We construct several measures of competition and test the relationship between competition and bank stability. We find that, on average, competition lowers stability, but that its effect varies across banks depending on the underlying financial health of the institution. Competition encourages relatively less sound banks (closer to insolvency) to reduce costs, lower portfolio risk and increase capital ratios, strengthening their stability, while it lowers the incentives of relatively more sound banks (farther from insolvency) to build capital ratios, weakening their stability. These findings imply trade-offs at the bank-level that may need to be weighed when evaluating policies with consequences for competition.

Keywords: Bank competition, bank stability, Boone indicator, Lerner index.

JEL Classification: G21, G28, L22.

Suggested Citation

de-Ramon, Sebastian and Francis, William and Straughan, Michael and Straughan, Michael, Bank Competition and Stability in the United Kingdom (August 3, 2018). Bank of England Working Paper No. 748, Available at SSRN: https://ssrn.com/abstract=3226827 or http://dx.doi.org/10.2139/ssrn.3226827

Sebastian De-Ramon (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Bank of England - Prudential Regulation Authority ( email )

20 Moorgate
London, EC2R 6DA
United Kingdom

Cambridge Econometrics ( email )

Reuben House
Covent Garden
Cambridge, CB1 2HT
United Kingdom

HOME PAGE: http://https://www.bankofengland.co.uk/research/researchers/sebastian-de-ramon

William Francis

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Michael Straughan

Bank of England - Prudential Regulation Authority ( email )

20 Moorgate
London, EC2R 6DA
United Kingdom

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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