Working Paper: NBER ID: w11500
Authors: Thorsten Beck; Asli Demirgüç-Kunt; Ross Levine
Abstract: Public policy debates and theoretical disputes motivate this paper's examination of (i) the relationship between bank concentration and banking system fragility and (ii) the mechanisms underlying this relationship. We find no support for the view that concentration increases the fragility of banks. Rather, banking system concentration is associated with a lower probability that the country suffers a systemic banking crisis. In terms of policies, we find that (i) regulations and institutions that facilitate competition in banking are associated with less—not more—banking system fragility and (ii) including these policy indicators does not change the results on concentration. This suggests that concentration is a proxy for something else besides the competitive environment. Also, we do not find that official capital regulations, reserve requirements, or official prudential regulations lower crises probabilities. Finally, we present suggestive evidence that concentrated banking systems tend to have larger, better-diversified banks, which may help account for the positive link between concentration and stability.
Keywords: No keywords provided
JEL Codes: G21; G28; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banking system concentration (G21) | lower probability of systemic crises (P34) |
| regulations promoting competition (L43) | lower fragility (F12) |
| banking system concentration (G21) | larger, better-diversified banks (G21) |
| larger, better-diversified banks (G21) | stability of banking systems (F65) |
| capital regulations (G28) | crisis probabilities (G01) |
| reserve requirements (E58) | crisis probabilities (G01) |