Bank Concentration and Fragility: Impact and Mechanics
55 Pages Posted: 1 Sep 2005 Last revised: 24 Jul 2009
Date Written: August 2005
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.
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