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Bank competition and stability in the United Kingdom

Author

Listed:
  • de-Ramon, Sebastian

    (Bank of England)

  • Francis, William

    (Bank of England)

  • Straughan, Michael

    (Bank of England)

Abstract

This paper examines the effects of competition on bank stability in the United Kingdom between 1994 and 2013. We construct several measures of competition and test the relationship between competition and bank stability. We find that, on average, competition lowers stability, but that its effect varies across banks depending on the underlying financial health of the institution. Competition encourages relatively less sound banks (closer to insolvency) to reduce costs, lower portfolio risk and increase capital ratios, strengthening their stability, while it lowers the incentives of relatively more sound banks (farther from insolvency) to build capital ratios, weakening their stability. These findings imply trade-offs at the bank-level that may need to be weighed when evaluating policies with consequences for competition.

Suggested Citation

  • de-Ramon, Sebastian & Francis, William & Straughan, Michael, 2018. "Bank competition and stability in the United Kingdom," Bank of England working papers 748, Bank of England.
    • Handle: RePEc:boe:boeewp:0748
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    2. Kanga, Désiré & Murinde, Victor & Soumaré, Issouf, 2021. "How has the rise of Pan-African banks impacted bank stability in WAEMU?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    3. Karadima, Maria & Louri, Helen, 2020. "Non-performing loans in the euro area: Does bank market power matter?," International Review of Financial Analysis, Elsevier, vol. 72(C).
    4. Guidi, Francesco, 2021. "Concentration, competition and financial stability in the South-East Europe banking context," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 639-670.
    5. Maria Karadima & Helen Louri, 2019. "Non-performing loans in the euro area: does market power matter?," Working Papers 271, Bank of Greece.
    6. Thiago Christiano Silva & Sergio Rubens Stancato de Souza & Solange Maria Guerra, 2021. "COVID-19 and Local Market Power in Credit Markets," Working Papers Series 558, Central Bank of Brazil, Research Department.
    7. Davis, E. Philip & Karim, Dilruba & Noel, Dennison, 2020. "The bank capital-competition-risk nexus – A global perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    8. de-Ramon, Sebastian & Francis, William B & Straughan, Michael, 2020. "The link between bank competition and risk in the United Kingdom: two views for policymaking," Bank of England working papers 885, Bank of England.
    9. E Philip Davis & Dilruba Karim & Dennison Noel, 2019. "Bank Leverage Ratios, Risk and Competition - An Investigation Using Individual Bank Data," National Institute of Economic and Social Research (NIESR) Discussion Papers 499, National Institute of Economic and Social Research.
    10. Maria Karadima & Helen Louri, 2020. "Reply to “Remarks on Bank Competition and Convergence Dynamics”," JRFM, MDPI, vol. 13(6), pages 1-6, June.
    11. Bátiz-Zuk Enrique & Lara Sánchez José Luis, 2021. "Revisiting the link between systemic risk and competition based on network theory and interbank exposures," Working Papers 2021-26, Banco de México.
    12. Davis, E. Philip & Karim, Dilruba & Noel, Dennison, 2022. "The effects of macroprudential policy on banks' profitability," International Review of Financial Analysis, Elsevier, vol. 80(C).
    13. Suss, Joel & Treitel, Henry, 2019. "Predicting bank distress in the UK with machine learning," Bank of England working papers 831, Bank of England.
    14. Mpho Rapapali & Witness Simbanegavi, 2020. "Competition in South African Banking An assessment using the Boone Indicator and PanzarRosse approaches," Working Papers 9819, South African Reserve Bank.

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    More about this item

    Keywords

    Bank competition; bank stability; Boone indicator; Lerner index.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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