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Bank Concentration and Fragility: Impact and Mechanics

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  • Thorsten Beck
  • Asli Demirguc-Kunt
  • Ross Levine

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 Carey, Mark and Rene Stulz (eds.) The Risk of Financial Institutions. Chicago: University of Chicago Press, 2006.
Handle: RePEc:nbr:nberwo:11500

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Cited by:
  1. Lee, Chien-Chiang & Hsieh, Meng-Fen, 2014. "Bank reforms, foreign ownership, and financial stability," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 204-224.
  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.
  3. Arnoud W.A. Boot & Matej Marinc, 2006. "Competition and Entry in Banking: Implications for Stability and Capital Regulation," Tinbergen Institute Discussion Papers 06-015/2, Tinbergen Institute.
  4. Ömer Ýskenderoglu & Serpil Tomak, 2013. "Competition and Stability: An Analysis of the Turkish Banking System," International Journal of Economics and Financial Issues, Econjournals, vol. 3(3), pages 752-762.
  5. Nier, Erlend & Baumann, Ursel, 2006. "Market discipline, disclosure and moral hazard in banking," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 332-361, July.
  6. 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.
  7. Martin Cihák & Simon Wolfe & Klaus Schaeck, 2006. "Are More Competitive Banking Systems More Stable?," IMF Working Papers 06/143, International Monetary Fund.
  8. Frederic S. Mishkin, 2005. "How Big a Problem is Too Big to Fail?," NBER Working Papers 11814, National Bureau of Economic Research, Inc.
  9. repec:dgr:uvatin:2006015 is not listed on IDEAS
  10. Joe Crowley, 2007. "Interest Rate Spreads in English-Speaking African Countries," IMF Working Papers 07/101, International Monetary Fund.
  11. CLICHICI, Dorina, 2013. "The Determinants Of Banking System Vulnerability In The Republic Of Moldova," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 17(4), pages 8-21.

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