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Competition, Efficiency, and Soundness in Banking: An Industrial Organization Perspective

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Author Info

  • Schaeck, K.
  • Cihák, M.

    (Tilburg University, Center for Economic Research)

Abstract

How can competition enhance bank soundness? Does competition improve soundness via the efficiency channel? Do banks heterogeneously respond to competition? To answer these questions, we exploit an innovative measure of competition [Boone, J., A new way to measure competition, EconJnl, Vol. 118, pp. 1245-1261] that captures the reallocation of profits from inefficient banks to their efficient counterparts. Based on two complementary datasets for Europe and the U.S., we first establish that the new competition indicator captures a broad variety of other characteristics of competition in a consistent manner. Second, we verify that competition increases efficiency. Third, we present novel evidence that efficiency is the conduit through which competition contributes to bank soundness. In a final examination of banks’ heterogeneous responses to competition, we find that smaller banks’ soundness measures respond more strongly to competition than larger banks’ soundness measures, and two-stage quantile regressions indicate that the soundness-enhancing effect of competition is larger in magnitude for sound banks than for fragile banks.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-68S.

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Date of creation: 2010
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Handle: RePEc:dgr:kubcen:201068s

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Web page: http://center.uvt.nl

Related research

Keywords: bank competition; efficiency; soundness; Boone indicator; quantile regression;

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References

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  1. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, 08.
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Citations

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Cited by:
  1. Tabak, Benjamin M. & Fazio, Dimas M. & Cajueiro, Daniel O., 2012. "The relationship between banking market competition and risk-taking: Do size and capitalization matter?," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3366-3381.
  2. Delis, Manthos D., 2012. "Bank competition, financial reform, and institutions: The importance of being developed," Journal of Development Economics, Elsevier, vol. 97(2), pages 450-465.
  3. Beck, T.H.L. & De Jonghe, O.G. & Schepens, G., 2011. "Bank Competition and Stability: Cross-country Heterogeneity (Replaced by CentER DP 2012-085)," Discussion Paper 2011-080, Tilburg University, Center for Economic Research.
  4. Tabak, Benjamin M. & Fazio, Dimas M. & Cajueiro, Daniel O., 2013. "Systemically important banks and financial stability: The case of Latin America," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3855-3866.
  5. Bing Xu & Adrian Van Rixtel & Michiel Van Leuvensteijn, 2013. "Measuring bank competition in China: a comparison of new versus conventional approaches applied to loan markets," BIS Working Papers 422, Bank for International Settlements.
  6. T. Beck & O. De Jonghe & G. Schepens, 2011. "Bank competition and stability: cross-country heterogeneity," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/732, Ghent University, Faculty of Economics and Business Administration.
  7. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2012. "How does bank competition affect systemic stability ?," Policy Research Working Paper Series 5981, The World Bank.
  8. Kick, Thomas & Prieto, Esteban, 2013. "Bank Risk Taking and Competition: Evidence from Regional Banking Markets," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79919, Verein für Socialpolitik / German Economic Association.
  9. Olszak, Małgorzata & Świtała, Filip & Kowalska, Iwona, 2013. "Competition in commercial banks in Poland – analysis of Panzar-Rosse H-statistics," MPRA Paper 53782, University Library of Munich, Germany.

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