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Are Competitive Banking Systems More Stable?


  • We would like to thank the editor, Deborah Lucas, and two anonymous referees for their valuable suggestions that helped significantly improve the paper. We also thank Erlend Nier, Hans Degryse, Giovanni Dell’Ariccia, Bob Eisenbeis, Alain Ize, Philipp Hartmann, Charles Goodhart, Alberto Pozzolo, Marcello Messori, George McKenzie, Johnnie Johnson, Masaki Yamada, Anastasios Plataniotis, Mahvash Saeed Qureshi, Sarah Odesanmi, and seminar participants at the International Monetary Fund; at the University of Southampton; at the Workshop “The Architecture of Financial System Stability: From Market Microstructure to Monetary Policy,” Capri, Italy; at the conference “The Changing Geography of Banking,” Ancona, Italy; and at the 8th ECB-CFS Conference “Financial Integration and Stability in Europe,” Madrid, Spain for helpful comments. All remaining errors are our own.

  • This paper's findings, interpretations, and conclusions are entirely those of the authors and do not necessarily reflect the views of the International Monetary Fund, its Executive Directors, or the countries they represent.


Using the Panzar and Rosse H-statistic as a measure of competition in 45 countries, we find that more competitive banking systems are less prone to experience a systemic crisis and exhibit increased time to crisis. This result holds even when we control for banking system concentration, which is associated with higher probability of a crisis and shorter time to crisis. Our results indicate that competition and concentration capture different characteristics of banking systems, meaning that concentration is an inappropriate proxy for competition. The findings suggest that policies promoting competition among banks, if well executed, have the potential to improve systemic stability.

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