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Competition, Efficiency, and Stability in Banking

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  • Klaus Schaeck
  • Martin Cihák

Abstract

type="main"> We examine the effect of competition on banking stability using a new measure of competition based on the reallocation of profits from inefficient banks to efficient ones. In a sample of European Banks, we find that this measure does capture competition, that competition is stability-enhancing, and that the stability-enhancing effect of competition is greater for healthy banks than for fragile ones. Our results suggest that efficiency is the conduit through which competition contributes to stability and that regulators must condition policy on the health of existing banks.

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  • Klaus Schaeck & Martin Cihák, 2014. "Competition, Efficiency, and Stability in Banking," Financial Management, Financial Management Association International, vol. 43(1), pages 215-241, March.
    • Handle: RePEc:bla:finmgt:v:43:y:2014:i:1:p:215-241
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