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How does bank competition affect systemic stability ?, Volume 1
 
Author:Anginer, Deniz; Demirguc-Kunt, Asli; Zhu, Min; Country:World;
Date Stored:2012/04/11Document Date:2012/02/01
Document Type:Policy Research Working PaperSubTopics:Access to Finance; Emerging Markets; Banks & Banking Reform; Debt Markets; Financial Intermediation
Language:EnglishMajor Sector:Finance
Rel. Proj ID:1W-The Crisis And Beyond: Fy11-Fy13 -- -- P122136;Region:The World Region
Report Number:WPS5981Sub Sectors:General finance sector
Collection Title:Policy Research working paper ; no. WPS 5981Volume No:1

Summary: Using bank level measures of competition and co-dependence, the authors show a robust positive relationship between bank competition and systemic stability. Whereas much of the extant literature has focused on the relationship between competition and the absolute level of risk of individual banks, in this paper we examine the correlation in the risk taking behavior of banks, hence systemic risk. The analysis finds that greater competition encourages banks to take on more diversified risks, making the banking system less fragile to shocks. Examining the impact of the institutional and regulatory environment on systemic stability shows that banking systems are more fragile in countries with weak supervision and private monitoring, high government ownership of banks, and in countries with public policies that restrict competition. Furthermore, lack of competition has a greater adverse effect on systemic stability in countries with generous safety nets and weak supervision.

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