Friday, January 22, 2016

State-Aid, Stability and Competition in European Banking

Fiordelisi, Franco ; Mare, Davide Salvatore ; Molyneux, Philip analyze State-Aid, Stability and Competition in European Banking.

ABSTRACT: What is the relationship between bank fragility and competition during a period of market turmoil? Does market power in European banking involve extra-gains after discounting for the cost of government intervention? We answer these questions in the context of Eurozone banking over 2005-2012 and show that greater market power increases bank stability implying aggregate extra-gains of 57% of EU12 gross domestic product for the banking sector after discounting for the costs associated with government intervention. The negative influence of competition on bank stability is non-monotonic and reverses for lower degrees of competition. Capital injections, guarantees and asset relief measures elicit greater bank soundness.

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