Institutional Diversity in Domestic Banking Sectors and Bank Stability: A Cross-Country Study

48 Pages Posted: 18 May 2020

See all articles by Christopher F. Baum

Christopher F. Baum

Boston College - Department of Economics

Caterina Forti Grazzini

European Central Bank (ECB)

Dorothea Schaefer

German Institute for Economic Research (DIW Berlin); JIBS

Date Written: May 2020

Abstract

This paper analyzes the causal relationship between institutional diversity in domestic banking sectors and bank stability. We use a large bank- and country-level unbalanced panel data set covering the EU member states’ banking sectors between 1998 and 2014. Constructing two distinct indicators for measuring institutional diversity, we find that a high degree of institutional diversity in the domestic banking sector positively affects bank stability. The positive relationship between domestic institutional diversity and bank stability is stronger in times of crisis, providing evidence that diversity can help to absorb both financial and real shocks. In particular, greater institutional diversity smooths bank earnings risk in times of crisis. Our results are economically meaningful and offer important insights to the ongoing economic policy debate on how to reshape the architecture of the banking sector.

Keywords: Institutional diversity, Shannon Index, Gini-Simpson Index, bank stability, financial crisis, bank competition

JEL Classification: G01,G20,G21,G28

Suggested Citation

Baum, Christopher (Kit) F. and Forti Grazzini, Caterina and Schaefer, Dorothea, Institutional Diversity in Domestic Banking Sectors and Bank Stability: A Cross-Country Study (May 2020). DIW Berlin Discussion Paper No. 1869, Available at SSRN: https://ssrn.com/abstract=3603940 or http://dx.doi.org/10.2139/ssrn.3603940

Christopher (Kit) F. Baum

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3673 (Phone)
617-552-2308 (Fax)

Caterina Forti Grazzini

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Dorothea Schaefer (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany
+49 30 8978 9162 (Phone)
+49 30 8978 9104 (Fax)

JIBS ( email )

Jönköping, 55111
Sweden

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