Bank Concentration and Fragility: Impact and Mechanics

55 Pages Posted: 1 Sep 2005 Last revised: 24 Jul 2009

Thorsten Beck

City University London - Sir John Cass Business School; Tilburg University - European Banking Center, CentER

Asli Demirgüç-Kunt

World Bank - Development Research Group; World Bank

Ross Levine

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Date Written: August 2005

Abstract

Public policy debates and theoretical disputes motivate this paper%u2019s examination of (i) therelationship between bank concentration and banking system fragility and (ii) the mechanismsunderlying this relationship. We find no support for the view that concentration increases thefragility of banks. Rather, banking system concentration is associated with a lower probability thatthe country suffers a systemic banking crisis. In terms of policies, we find that (i) regulations andinstitutions that facilitate competition in banking are associated with less -- not more -- bankingsystem fragility and (ii) including these policy indicators does not change the results onconcentration. This suggests that concentration is a proxy for something else besides the competitiveenvironment. Also, we do not find that official capital regulations, reserve requirements, or officialprudential regulations lower crises probabilities. Finally, we present suggestive evidence thatconcentrated banking systems tend to have larger, better-diversified banks, which may help accountfor the positive link between concentration and stability.

Suggested Citation

Beck, Thorsten and Demirgüç-Kunt, Asli and Levine, Ross Eric, Bank Concentration and Fragility: Impact and Mechanics (August 2005). NBER Working Paper No. w11500. Available at SSRN: https://ssrn.com/abstract=775990

Thorsten Beck

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Tilburg University - European Banking Center, CentER ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

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

Ross Eric Levine (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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