The Impact of Market Power on Bank Risk Taking in Albania

The general belief that some degree of market power in the banking sector was necessary to maintain its market stability, has led many countries into attending policies that implicitly or explicitly limit competition. Such policies have modified the banking market structure raising concerns about the competition and efficiency issues. Concerns grow even more for developing economies and especially for the Albanian banking system. Here, bank loans are the biggest source of the external financing for businesses and hence of the economic growth. Nevertheless, the link between competition and stability is quite complex. This is the main reason why this paper provides a test of such a relationship for the Albanian banking system. Competition level measured mainly by the Lerner index, while stability is assessed by Z index and non-performing loan /total loan. The analysis indicates that competition enhancement into the loan market has increased the risk taking, but the effect on the overall level of banking stability is not of great importance.