Bank Competition and Stability: Cross-Country Heterogeneity

Abstract

This paper documents large cross-country variation in the relationship between bank competition and bank stability and explores market, regulatory and institutional features that can explain this variation. We show that an increase in competition will have a larger impact on banks’ fragility in countries with stricter activity restrictions, lower systemic fragility, better developed stock exchanges, more generous deposit insurance and more effective systems of credit information sharing. The effects are economically large and thus have important repercussions for the current regulatory reform debate.

Keywords: Competition, Stability, Banking, Herding, Deposit Insurance, Information Sharing, Risk Shifting

JEL Classification: G21, G28, L51