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Credit market concentration and systemic risk in Europe

Author

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  • Merike Kukk
  • Alari Paulus
  • Nicolas Reigl

Abstract

We assess empirically the relationship between credit market concentration and a novel country-level systemic risk indicator that has been developed at the European Central Bank. We find a weakly U-shaped relationship between market concentration and systemic risk for Western European countries, where very low and high levels of market concentration are associated with higher systemic risk. Cumulative estimates with dynamic models show that systemic risk has a persistent negative response to an increase in market concentration from low and median levels of concentration. Local projection estimates for the period preceding the global financial crisis also suggest that an increase in market concentration may have further added to systemic risk at a time when it was building up in countries with high banking concentration, demonstrating the complexity of the relationship between systemic risk and market concentration

Suggested Citation

  • Merike Kukk & Alari Paulus & Nicolas Reigl, 2022. "Credit market concentration and systemic risk in Europe," Bank of Estonia Working Papers wp2022-4, Bank of Estonia, revised 24 Mar 2022.
    • Handle: RePEc:eea:boewps:wp2022-4
    DOI: 10.23656/25045520/042022/0194
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    References listed on IDEAS

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    More about this item

    Keywords

    systemic risk; financial stability; credit institutions; credit growth; market concentration;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling

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