How Does Bank Competition Affect Systemic Stability?

45 Pages Posted: 13 Mar 2012 Last revised: 8 Dec 2013

See all articles by Deniz Anginer

Deniz Anginer

Simon Fraser University (SFU)

Asli Demirgüç-Kunt

World Bank

Min Zhu

City University of Hong Kong (CityU); 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: November 2013

Abstract

Using bank level measures of competition and co-dependence, we show a robust negative relationship between bank competition and systemic risk. 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. We find 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 bank systemic risk shows that banking systems are more fragile in countries with weak supervision and private monitoring, greater government ownership of banks, and with public policies that restrict competition. We also find that the negative effect of lack of competition can be mitigated by a strong institutional environment that allows for efficient public and private monitoring of financial institutions.

Keywords: Systemic risk, bank competition, credit risk, merton model, distance to default, default risk, lerner index, bank concentration

JEL Classification: G21, L11, L14

Suggested Citation

Anginer, Deniz and Demirgüç-Kunt, Asli and Zhu, Min, How Does Bank Competition Affect Systemic Stability? (November 2013). Journal of Financial Intermediation, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2020584 or http://dx.doi.org/10.2139/ssrn.2020584

Deniz Anginer

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Asli Demirgüç-Kunt (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Min Zhu

City University of Hong Kong (CityU)

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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