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How Does Bank Competition Affect Systemic Stability?

41 Pages Posted: 20 Apr 2016  

Deniz Anginer

World Bank Research

Asli Demirgüç-Kunt

World Bank - Development Research Group; World Bank

Min Zhu

City University of Hong Kong (CityUHK); World Bank - Development Research Group; University of Michigan, Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2012

Abstract

Using bank level measures of competition and co-dependence, the authors show a robust positive relationship between bank competition and systemic stability. Whereas much of the extant literature has focused on the relationship between competition and the absolute level of risk of individual banks, in this paper we examine the correlation in the risk taking behavior of banks, hence systemic risk. The analysis finds that greater competition encourages banks to take on more diversified risks, making the banking system less fragile to shocks. Examining the impact of the institutional and regulatory environment on systemic stability shows that banking systems are more fragile in countries with weak supervision and private monitoring, high government ownership of banks, and in countries with public policies that restrict competition. Furthermore, lack of competition has a greater adverse effect on systemic stability in countries with generous safety nets and weak supervision.

Keywords: Banks & Banking Reform, Access to Finance, Debt Markets, Financial Intermediation, Emerging Markets

Suggested Citation

Anginer, Deniz and Demirgüç-Kunt, Asli and Zhu, Min, How Does Bank Competition Affect Systemic Stability? (February 1, 2012). World Bank Policy Research Working Paper No. 5981. Available at SSRN: https://ssrn.com/abstract=2013865

Deniz Anginer (Contact Author)

World Bank Research ( email )

1818 H Street, NW
Washington, DC 20433
United States

Asli Demirgüç-Kunt

World Bank - Development Research Group ( email )

United States
202-473-7479 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/ademirguckunt/

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Min Zhu

City University of Hong Kong (CityUHK)

83 Tat Chee Avenue
Kowloon
Hong Kong
China

World Bank - Development Research Group

1818 H Street NW
Washington, DC DC 20433
United States

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States

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