Competition and banking stability in Europe
: empirical evidence

  • Gennaro Bevilacqua (Student)

Student thesis: Master's Thesis

Abstract

Although the increasing concern about financial stability in the aftermath of the Global Financial Crisis has been a fundamental focus of academic research, the academic literature has not yet reached a conclusion on whether competition is truly beneficial for banking stability. Under the traditional "competition-fragility" view, concentrated banking systems are more stable since the possession of a valuable "charter" discourages banks in engaging in imprudent behaviors. In contrast, the alternative "competition-stability" view argues that concentrated systems are more fragile as higher loan rates attract riskier borrowers. Extending the empirical study by Uhde and Heimeshoff (2009), the present Dissertation empirically investigates the relationship between banking competition and stability in 27 European countries during the 1997-2017 period, using annual data extracted from the World Bank and the ECB databases. The Herfindahl-Hirschman Index is used as a proxy for competition, while the Z-score is employed to capture banking sector stability.Using a GLS random effect model (coupled with 2SLS instrumental variable technique), the present Dissertation's main findings unveil a positive relationship between competition and banking stability in Europe while controlling for macroeconomic, banking, regulatory, and institutional variables. In addition, the present critical analysis indicates that the higher volatility of returns renders concentrated systems more prone to financial instability. All in all, the present Dissertation's results raise concerns about the banking consolidation trend in the recent years in Europe. Policy makers must encourage competition as market discipline is a necessary requisite for a safe banking system.
Date of Award18 Oct 2021
Original languageEnglish
Awarding Institution
  • Universidade Católica Portuguesa
SupervisorDiptes Chandrakante Prabhudas Bhimjee (Supervisor)

Keywords

  • Banking competition
  • Banking stability
  • Herfindahl-Hirschman index
  • Z-score
  • Europe
  • Volatility of returns

Designation

  • Mestrado em Economia

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