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How Market Power Influences Bank Failures Evidence from Russia

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  • Zuzana Fungacova

    (BOFIT, Bank of Finland)

  • Laurent Weill

    ()
    (LaRGE Research Center, Université de Strasbourg)

Abstract

There 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 in line with the previous literature we employ the Lerner index as the metric of bank competition. Our findings clearly support the view that tighter bank competition enhances the occurrence of bank failures. The normative implication of our findings is therefore that measures that increase bank competition could undermine financial stability.

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Bibliographic Info

Paper provided by Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg in its series Working Papers of LaRGE Research Center with number 2010-08.

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Date of creation: 2010
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Handle: RePEc:lar:wpaper:2010-08

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Keywords: Bank competition; bank failure; Russia.;

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References

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  1. Beck, T.H.L. & Demirgüç-Kunt, A. & Levine, R., 2006. "Bank concentration, competition, and crises: First results," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125498, Tilburg University.
  2. Carbó, Santiago & Humphrey, David & Maudos, Joaquín & Molyneux, Philip, 2009. "Cross-country comparisons of competition and pricing power in European banking," Journal of International Money and Finance, Elsevier, vol. 28(1), pages 115-134, February.
  3. Solís, Liliana & Maudos, Joaquín, 2008. "The social costs of bank market power: Evidence from Mexico," Journal of Comparative Economics, Elsevier, vol. 36(3), pages 467-488, September.
  4. Gabriel Jiménez & Jose A. Lopez & Jesús Saurina, 2007. "How does competition impact bank risk-taking?," Working Paper Series 2007-23, Federal Reserve Bank of San Francisco.
  5. Anatoly Peresetsky & Alexandr Karminsky & Sergei Golovan, 2011. "Probability of default models of Russian banks," Economic Change and Restructuring, Springer, vol. 44(4), pages 297-334, November.
  6. Francisco Pérez García & Joaquín Maudos Villarroya & Juan Francisco Fernández de Guevara Radoselovics, 2002. "Market Power In European Banking Sectors," Working Papers. Serie EC 2002-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  7. Caminal, Ramon & Matutes, Carmen, 2002. "Market power and banking failures," International Journal of Industrial Organization, Elsevier, vol. 20(9), pages 1341-1361, November.
  8. Arena, Marco, 2008. "Bank failures and bank fundamentals: A comparative analysis of Latin America and East Asia during the nineties using bank-level data," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 299-310, February.
  9. Gianni De Nicoló & Elena Loukoianova, 2007. "Bank Ownership, Market Structure and Risk," IMF Working Papers 07/215, International Monetary Fund.
  10. Martin Cihák & Simon Wolfe & Klaus Schaeck, 2006. "Are More Competitive Banking Systems More Stable?," IMF Working Papers 06/143, International Monetary Fund.
  11. Matutes, Carmen & Vives, Xavier, 1995. "Imperfect Competition, Risk Taking, and Regulation in Banking," CEPR Discussion Papers 1177, C.E.P.R. Discussion Papers.
  12. Allen Berger & Leora Klapper & Rima Turk-Ariss, 2009. "Bank Competition and Financial Stability," Journal of Financial Services Research, Springer, vol. 35(2), pages 99-118, April.
  13. Rafael Repullo & David Martínez-Miera, 2008. "Does Competition Reduce The Risk Of Bank Failure?," Working Papers wp2008_0801, CEMFI.
  14. A. Karas & W. Pyle & K. Schoors, 2007. "Sophisticated Discipline in a Nascent Deposit Market: Evidence from Post-Communist Russia," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/450, Ghent University, Faculty of Economics and Business Administration.
  15. Männasoo, Kadri & Mayes, David G., 2009. "Explaining bank distress in Eastern European transition economies," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 244-253, February.
  16. Claeys, Sophie & Schoors, Koen, 2007. "Bank supervision Russian style: Evidence of conflicts between micro- and macroprudential concerns," Working Paper Series 205, Sveriges Riksbank (Central Bank of Sweden).
  17. David C. Wheelock & Paul W. Wilson, 2000. "Why do Banks Disappear? The Determinants of U.S. Bank Failures and Acquisitions," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 127-138, February.
  18. Glushkova, Ekaterina & Vernikov, Andrei, 2009. "How big is the visible hand of the state in the Russian banking industry?," MPRA Paper 15563, University Library of Munich, Germany.
  19. Maudos, Joaquin & Fernandez de Guevara, Juan, 2006. "The cost of market power in banking: social welfare loss vs. inefficiency cost," MPRA Paper 15253, University Library of Munich, Germany.
  20. John H. Boyd & Gianni De Nicolã, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, 06.
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Citations

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Cited by:
  1. Olga Pak & Mira Nurmakhanova, 2013. "The Effect of Market Power on Bank Credit Risk-Taking and Bank Stability in Kazakhstan," Transition Studies Review, Springer, vol. 20(3), pages 335-350, November.
  2. Horvath, Roman & Seidler, Jakub & Weill, Laurent, 2013. "How bank competition influence liquidity creation," BOFIT Discussion Papers 16/2013, Bank of Finland, Institute for Economies in Transition.
  3. Aadil Nakhoda, 2013. "Bank Competition and Export Diversification," EERI Research Paper Series EERI RP 2013/12, Economics and Econometrics Research Institute (EERI), Brussels.
  4. Małgorzata, 2011. "Competition in the Polish banking market prior to recent crisis for the period 1997–2007 – empirical results obtained with the use of three different models," Bank i Kredyt, National Bank of Poland, Economic Institute, vol. 42(5), pages 5-40.
  5. Jarko Fidrmuc & Philipp J. Süss, 2011. "The Outbreak of the Russian Banking Crisis," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 5(1), pages 046-063, March.
  6. Mamonov, Mikhail, 2012. "The impact of market power of Russian banks on their credit risk tolerance: A panel study," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 28(4), pages 85-112.
  7. Alexander Karminsky & Alexander Kostrov & Taras Murzenkov, 2012. "Comparison of default probability models: Russian experience," HSE Working papers WP BRP 06/FE/2012, National Research University Higher School of Economics.
  8. Pestova Anna & Mamonov Mikhail, 2013. "Macroeconomic and bank?specific determinants of credit risk: evidence from Russia," EERC Working Paper Series 13/10e, EERC Research Network, Russia and CIS.
  9. Zuzana Fungácová & Laurent Weill, 2014. "Understanding Financial Inclusion in China," Working Papers of LaRGE Research Center 2014-06, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  10. Elmas Yaldiz & Flavio Bazzana, 2010. "The effect of market power on bank risk taking in Turkey," Financial Theory and Practice, Institute of Public Finance, vol. 34(3), pages 297-314.
  11. Mikhail Mamonov, 2013. "Bad management, skimping, or both? The relationship between cost efficiency and loan quality in Russian banks," HSE Working papers WP BRP 19/FE/2013, National Research University Higher School of Economics.
  12. Laurent Weill, 2011. "Bank Competition in the EU: How Has It Evolved?," Working Papers of LaRGE Research Center 2011-04, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  13. Karminsky, A. & Kostrov, A., 2013. "Modeling the Default Probabilities of Russian Banks: Extended Abillities," Journal of the New Economic Association, New Economic Association, vol. 17(1), pages 64-86.

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