Thursday, August 10, 2017
ABSTRACT: This paper addresses the dynamic relationship between competition and bank stability in Albanian banking system during the period 2008 - 2015. To this purpose, we construct a proxy for bank competition as referred to the Boone indicator. We also calculated the Lerner index and the efficient adjusted Lerner index, as well as the profit elasticity index and the Herfindahl–Hirschman Index. The main results provide support for the “competition – stability” view – that lower degree of market power sets banks to less overall risk exposure. The results further show that increasing concentration will have a larger impact on bank’s fragility. Similar, bank stability is positively linked with macroeconomic conditions and capital ratio and inverse with operational efficiency. We also used a quadratic term of the competition measures to capture a possible non-linear relationship between competition and stability, but find no supportive evidence.