Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153366
Authors: 
Schaeck, Klaus
Čihák, Martin
Year of Publication: 
2008
Series/Report no.: 
ECB Working Paper 932
Abstract: 
A growing body of literature indicates that competition increases bank soundness. Applying an industrial organization based approach to large data sets for European and U.S. banks, we offer new empirical evidence that efficiency plays a key role in the transmission from competition to soundness. We use a two-pronged approach. First, we employ Granger causality tests to establish the link between competition and measures of profit efficiency in banking, and find that competition indeed increases bank efficiency. Second, building on these results, we examine the relation between the Boone indicator [Boone, J. (2001) Intensity of competition and the incentive to innovate. IJIO, Vol. 19, pp. 705-726], an innovative measure of competition that focuses on the impact of competition on performance of efficient banks, and relate this measure to bank soundness. We find evidence that competition robustly increases bank soundness, via the efficiency channel.
Subjects: 
Bank competition
Efficiency
market structure
regulation
soundness
JEL: 
G21
G28
L11
Document Type: 
Working Paper

Files in This Item:
File
Size
981.67 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.