Concentration in the Banking Sector and Financial Stability : New Evidence
Theory suggests that the effect of banking market concentration on financial stability is mediated by several competing variables. Using a sample of 68 countries from 1997 to 2015, this paper proposes a unified empirical framework to test for the s...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/953311539698216215/Concentration-in-the-Banking-Sector-and-Financial-Stability-New-Evidence http://hdl.handle.net/10986/30583 |
| Summary: | Theory suggests that the effect of
banking market concentration on financial stability is
mediated by several competing variables. Using a sample of
68 countries from 1997 to 2015, this paper proposes a
unified empirical framework to test for the simultaneous
presence and impact of the mediators through which
concentration is expected to impact financial stability. The
results indicate that the magnitude and net effect of the
mediators depend upon the level of concentration. At lower
levels of concentration, increasing concentration improves
banking system stability via profitability. At higher levels
of concentration, increasing concentration makes the banking
system more fragile because of the cost of credit,
diversification and the ease of monitoring. For intermediate
levels, concentration has no significant effect on financial
stability, as the competing moderators cancel each other
out. The results suggest that an intermediate level of
concentration may be optimal for welfare. |
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