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Credit Risk and Competitive Behavior in European Banking

Author

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  • Didar Erdinç

    (American University in Bulgaria)

Abstract

This paper revisits the bank competition-stability nexus in European banking from a novel angle treating jointly and interactively a set of competition and concentration measures. We explore the impact of the Lerner index, the Boone indicator, and the 5-bank concentration ratio on credit risk for a panel of 36 European countries during 1999–2019. Our findings based on system-GMM estimations provide support for a non-linear competition-stability relationship such that market power enhances banks’ credit risk in an inverse U-shaped form. We find that there is a threshold level of market power beyond which credit risk deteriorates. Our results are enhanced when an efficiency-based competition measure, the Boone measure, is interacted with the market power indicator, the Lerner index: stronger the role of efficiency in driving competitive position of banks, weaker is the impact of market power on credit risk. We also find support for a “concentration-stability” argument implying that concentration does not necessarily imply lack of competition: competition and concentration may coexist with a favorable impact on bank stability if contestability is maintained in the presence of leading banks with efficiency advantages. Policy makers should monitor a wider mix of competition-concentration measures as an additional macroprudential channel to ensure bank stability.

Suggested Citation

  • Didar Erdinç, 2025. "Credit Risk and Competitive Behavior in European Banking," Eurasian Studies in Business and Economics,, Springer.
    • Handle: RePEc:spr:eurchp:978-3-031-84319-8_13
    DOI: 10.1007/978-3-031-84319-8_13
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