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Bank Concentration and Fragility: Impact and Mechanics

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Author Info
Thorsten Beck
Asli Demirguc-Kunt
Ross Levine

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Abstract

Public policy debates and theoretical disputes motivate this paper%u2019s examination of (i) the relationship between bank concentration and banking system fragility and (ii) the mechanisms underlying this relationship. We find no support for the view that concentration increases the fragility of banks. Rather, banking system concentration is associated with a lower probability that the country suffers a systemic banking crisis. In terms of policies, we find that (i) regulations and institutions that facilitate competition in banking are associated with less  not more -- banking system fragility and (ii) including these policy indicators does not change the results on concentration. This suggests that concentration is a proxy for something else besides the competitive environment. Also, we do not find that official capital regulations, reserve requirements, or official prudential regulations lower crises probabilities. Finally, we present suggestive evidence that concentrated banking systems tend to have larger, better-diversified banks, which may help account for the positive link between concentration and stability.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11500.

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Date of creation: Aug 2005
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Publication status: published as Thorsten Beck. "Bank Concentration and Fragility. Impact and Mechanics," in Mark Carey and René M. Stulz, editors, "The Risks of Financial Institutions" University of Chicago Press (2006)
Handle: RePEc:nbr:nberwo:11500

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Martin Cihák & Klaus Schaeck & Simon Wolfe, 2006. "Are More Competitive Banking Systems More Stable?," IMF Working Papers 06/143, International Monetary Fund. [Downloadable!]
  2. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2004. "Finance, inequality, and poverty: cross-country evidence," Policy Research Working Paper Series 3338, The World Bank. [Downloadable!]
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  3. Boot, Arnoud W A & Marinc, Matej, 2006. "Competition and Entry in Banking: Implications for Stability and Capital Regulation," CEPR Discussion Papers 5518, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Joe Crowley, 2007. "Interest Rate Spreads in English-Speaking African Countries," IMF Working Papers 07/101, International Monetary Fund. [Downloadable!]
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