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Bank Concentration and Fragility: Impact and Mechanics

  • Thorsten Beck
  • Asli Demirguc-Kunt
  • Ross Levine

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
Note: CF IFM
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