Bank concentration, competition and financial stability

Using data on 76 countries from 1990 – 2007 this paper provides evidence that concentrated banking systems are less likely to experience episodes of systemic banking crises. Besides that, the results also support the competition-fragility hypothesis. Especially banking sectors that are (almost) perfectly competitive are prone to financial crises. Although competition negatively affects financial stability, policy makers should not curtail competition. Instead they should adopt an incentive compatible financial safety net and monitor banks more closely.