Competition, Efficiency, and Stability in Banking

Klaus Schaeck*, Martin Cihák

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)

117 Citations (Scopus)

Abstract

We examine the effect of competition on banking stability using a new measure of competition based on the reallocation of profits from inefficient banks to efficient ones. In a sample of European Banks, we find that this measure does capture competition, that competition is stability-enhancing, and that the stability-enhancing effect of competition is greater for healthy banks than for fragile ones. Our results suggest that efficiency is the conduit through which competition contributes to stability and that regulators must condition policy on the health of existing banks.

Original languageEnglish
Pages (from-to)215-241
Number of pages27
JournalFinancial Management
Volume43
Issue number1
DOIs
Publication statusPublished - 2014

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