Clarifying the Concentration-Stability Controversy in Banking: Evidence from the EU-25.

26 Pages Posted: 27 Jan 2015 Last revised: 26 Nov 2019

See all articles by Pieter IJtsma

Pieter IJtsma

University of Groningen

Laura Spierdijk

University of Twente - Department of Behavioural, Management and Social Sciences - Financial Engineering section

Date Written: May 13, 2015

Abstract

We use panel data from the EU-25 to estimate the effect of changes in the degree of banking market concentration on the stability of banks by performing separate analyses at the country level and the bank level. The results indicate that the level of analysis matters. Whereas our country-level analysis suggests a negative relationship between market concentration and stability, the sign of the estimated effect is reversed when the analysis is performed at the bank level. We argue that the latter approach is more appropriate because it focuses solely on the within-bank variation in stability and because it allows to control for bank-specific characteristics and unobserved bank heterogeneity. The evidence partly supports the view that increases in the degree of banking market concentration.

Keywords: Financial stability, market structure, systemic risk

JEL Classification: G21, G28, G34, L110, L16

Suggested Citation

IJtsma, Pieter and Spierdijk, Laura, Clarifying the Concentration-Stability Controversy in Banking: Evidence from the EU-25. (May 13, 2015). Available at SSRN: https://ssrn.com/abstract=2555583 or http://dx.doi.org/10.2139/ssrn.2555583

Pieter IJtsma (Contact Author)

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

Laura Spierdijk

University of Twente - Department of Behavioural, Management and Social Sciences - Financial Engineering section ( email )

Hallenweg 17
Enschede, 7522NH
Netherlands

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