Are More Competitive Banking Systems More Stable?

37 Pages Posted: 19 Jul 2006

See all articles by Simon Wolfe

Simon Wolfe

University of Southampton - School of Management; University of Southampton - Southampton Business School

Klaus Schaeck

University of Bristol

Martin Čihák

International Monetary Fund (IMF)

Abstract

Using the Panzar and Rosse H-Statistic as a measure of competition in 45 countries, we find that more competitive banking systems are less prone to experience a systemic crisis and exhibit increased time to crisis. This result holds even when we control for banking system concentration, which is associated with higher probability of crisis and shorter time to crisis. Our results indicate that competition and concentration capture different characteristics of banking systems, meaning that concentration is an inappropriate proxy for competition. Our findings suggest that policies promoting competition among banks, if well executed, have potential to improve systemic stability.

Keywords: systemic risk, Banking competition, Market structure, Regulation

JEL Classification: C41, G21, G28, L11

Suggested Citation

Wolfe, Simon and Schaeck, Klaus and Cihak, Martin, Are More Competitive Banking Systems More Stable?. IMF Working Paper No. WP/06/143; Journal of Money, Credit, and Banking, Vol. 41, pp. 711-734. Available at SSRN: https://ssrn.com/abstract=917588

Simon Wolfe

University of Southampton - School of Management ( email )

Highfield
Southampton S017 1BJ, Hampshire SO17 1BJ
United Kingdom

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

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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