Competition, Efficiency, and Stability in Banking

Financial Management, Vol. 43, pp. 215–241

32 Pages Posted: 6 Jan 2013 Last revised: 12 Mar 2014

Klaus Schaeck

University of Bristol

Martin Čihák

International Monetary Fund (IMF)

Multiple version iconThere are 3 versions of this paper

Date Written: December 26, 2012

Abstract

We examine the effect of competition on banking stability using a new measure of competition based on the reallocation of profits from inefficient banks to efficient ones (Boone, 2008). Examining a sample of European banks, we show that this measure does capture competition, that competition is stability-enhancing, and that the stability-enhancing effect of competition is greater for healthy banks than for fragile ones. Our results suggest that efficiency is the conduit through which competition contributes to stability and that regulators must condition policy on the health of existing banks.

Keywords: competition, efficiency, stability, Boone indicator, quantile regression, regulation

JEL Classification: G21, G28

Suggested Citation

Schaeck, Klaus and Čihák, Martin, Competition, Efficiency, and Stability in Banking (December 26, 2012). Financial Management, Vol. 43, pp. 215–241. Available at SSRN: https://ssrn.com/abstract=2193929

Klaus Schaeck (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Martin Cihak

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

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