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Competition and stability in the European Union banking sector

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  • Cândida Ferreira

Abstract

This paper empirically tests the two competing hypotheses regarding the relationship between competition and stability: the competition-fragility hypothesis and the competition-stability hypothesis. The banking sector stability is first proxied by the estimated Z-score that provides a measure of overall bank stability. Further, the paper separately considers some specific constituent components of the Z-score measure to analyse different aspects of the bank stability: bank profitability and bank capitalisation. Two different measures are used to represent bank competition: the Herfindahl-Hirschman Index (a specific measure of market concentration), and the Boone indicator (which measures competition from an efficiency perspective). Using data sourced from the Moody’s Analytics BankFocus database, the paper applies panel estimations to a relatively large panel including 784 relevant banks of all the 27 European Union countries, between 2006 and 2021. The main findings overall confirm the validity of the competitionfragility hypothesis. Moreover, the results obtained for two specific EU countries: Germany and France, highlight some specific differences in particular regarding the effects of bank market concentration, and the responses to the crises that affected the EU banking institutions over the considered period. The findings of this paper reinforce the relevance of the policy makers’ role and give room to some recommendations.

Suggested Citation

  • Cândida Ferreira, 2023. "Competition and stability in the European Union banking sector," Working Papers REM 2023/0261, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp02612023
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank stability: bank competition; Z-score; Herfindahl-Hirschman Index; Boone indicator; EU banking sector.;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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