Are More Competitive Banking Systems More Stable?

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