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Financial Stability and Market Structure: International Evidence

Author

Listed:
  • Marcos Soares da Silva

    (Banco Central do Brasil)

  • José Angelo Divino

    (Universidade Católica de Brasília)

Abstract

Although the economic theory recognizes the ambiguous relationship between market structure and stability of the bank sector, some models, such as the one of competition-fragility by Allen and Gale (2004), suggest that increasing competition leads financial institutions to take more risks. As a result, financial markets that are more concentrated also present higher financial stability. To assess this hypothesis, we estimate a dynamic panel data model for 41 countries in the period from 1987 to 2007. The econometric model included covariates for level of income, characteristics of the financial market, economic environment, and macro prudential regulation. We used the following databases: “A new database on financial development and structure” and “Bank regulation and supervision”, from the World Bank, and “Systemic banking crises: a new database”, from the International Monetary Fund. The results indicate that the greater the market concentration the higher the stability of the banking system.

Suggested Citation

  • Marcos Soares da Silva & José Angelo Divino, 2012. "Financial Stability and Market Structure: International Evidence," Brazilian Review of Finance, Brazilian Society of Finance, vol. 10(1), pages 7-29.
    • Handle: RePEc:brf:journl:v:10:y:2012:i:1:p:7-29
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    More about this item

    Keywords

    Financial stability; Market structure; Dynamic panel data;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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