How market power influences bank failures: Evidence from Russia
AbstractThere has been a notable debate in the banking literature on the impact of bank competition on financial stability. While the dominant view sees a detrimental impact of competition on the stability of banks, this view has recently been challenged by Boyd and De Nicolo (2005) who see the reverse effect. The aim of this paper is to contribute to this literature by providing the first empirical investigation of the role of bank competition on the occurrence of bank failures. We analyze this issue based on a large sample of Russian banks over the period 2001-2007 and employ the Lerner index as the metric of bank competition. The Russian banking industry is a unique example of an emerging market which has undergone a large number of bank failures during the last decade. Our findings clearly support the view that tighter bank competition is detrimental for financial stability. This result is robust to tests controlling for the measurement of market power, the definition of bank failure, the set of control variables, and the particular linear specification of the relationship. The normative implication of our findings is therefore that measures that increase bank competition could undermine financial stability.
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Bibliographic InfoPaper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 12/2009.
Length: 31 pages
Date of creation: 10 Sep 2009
Date of revision:
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bank competition; bank failure; Russia;
Other versions of this item:
- Zuzana Fungacova & Laurent Weill, 2010. "How Market Power Influences Bank Failures Evidence from Russia," Working Papers of LaRGE Research Center 2010-08, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg (France).
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-26 (All new papers)
- NEP-BAN-2009-09-26 (Banking)
- NEP-CIS-2009-09-26 (Confederation of Independent States)
- NEP-COM-2009-09-26 (Industrial Competition)
- NEP-EFF-2009-09-26 (Efficiency & Productivity)
- NEP-TRA-2009-09-26 (Transition Economics)
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