Bank Competition and Stability: Cross-country Heterogeneity

Posted by D. Daniel Sokol

Thorsten Beck (Tilburg University), Olivier De Jonghe (Tilburg University), and Glenn Schepens (Ghent University) have an interesting paper on Bank Competition and Stability: Cross-country Heterogeneity.

ABSTRACT: This paper documents a large cross-country variation in the relationship between bank competition and stability and explores market, regulatory and institutional features that can explain this heterogeneity. Combining insights from the competition-stability and regulation-stability literatures, we develop a unified framework to assess how regulation, supervision and other institutional factors may make it more likely that the data favor the charter-value paradigm or the risk-shifting paradigm. We show that an increase in competition will have a larger impact on banks' risk taking incentives in countries with stricter activity restrictions, more homogenous market structures, more generous deposit insurance and more effective systems of credit information sharing.