How Does Bank Competition Affect Systemic Banking Crises?

Samangi Bandaranayake

Abstract

Literature present conflicting views on the effect of bank competition on financial stability. Some argue that competition increases adverse shocks in the financial system while others argue that it reduces the likelihood of such events. The purpose of this study is to further examine this relationship using a more recent systemic banking crises database of Laeven and Valencia (2018). There are 61 countries  which had experienced systemic crises during 1996-2017. This study used Lerner index and Boone indicator as proxy measures of competition and three estimation techniques to estimate the relationship. The results indicate that the effect of competition on financial stability varies with estimation techniques and proxy measures of competition and stability. Lerner index indicates that competition increases financial instability while Boone indicator shows the opposite. Thus, this study concludes with mixed evidence on the relationship between bank competition and financial stability.

Keywords:   Bank Competition, Boone Indicator, Lerner Index, Systemic Banking Crises

Volume 10, Issue 2
December 31, 2019
Pages: 1-24

DOI: http://doi.org/10.4038/cbj.v10i2.49

Suggested citation:

Bandaranayake, S. (2019). How does bank competition affect systemic banking crises? Colombo Business Journal. (10)2, 1-24. doi: 10.4038/cbj.v10i2.49

Samangi Bandaranayake
Department of Finance, University of Colombo, Sri Lanka
samangibandaranayake@dfn.cmb.ac.lk