Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/82625 
Year of Publication: 
2013
Series/Report no.: 
Bundesbank Discussion Paper No. 30/2013
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
This study investigates the bank competition-stability nexus using a unique regulatory dataset provided by the Deutsche Bundesbank over the period 1994 to 2010. First, we use outright bank defaults as the most direct measure of bank risk available and contrast the results to weaker forms of bank distress. Second, we control for a wide array of different time-varying characteristics of banks which are likely to influence the competition-risk taking channel. Third, we include different measures of competition, contestability and market power, each corresponding to a different contextual level of a bank's competitive environment. Our results indicate that political implications derived from empirical banking market studies must recognize the theoretical properties of the indicators for market power and competition. Using the Lerner Index as a proxy for bank-specific market power, our results support the view that market power tends to reduce banks' default probability. In contrast, using the Boone Indicator (derived on the state level) and/or the regional branch share as a measure of competition, we find strong support that increased competition lowers the riskiness of banks.
Subjects: 
bank risk
bank competition
instrumental variables models
JEL: 
C35
G21
G32
L50
ISBN: 
9783865589460
Document Type: 
Working Paper

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