WHAT ABOUT THE RELATIONSHIP BETWEEN BANKING COMPETITION AND FINANCIAL STABILITY? CASE OF ALBANIA

The banking sector serves as a key instrument through which instability may be transmitted to other sectors in the economy. The scare due to banking fragility caused by upper concentration, has usually strained policymakers to focus on developing policies which sustain stability of banking sector. Currently, we faced to global financial crisis and consequences of it. That’s one more reason to be more careful at this time, particularly, concerning banking sector. Banking competition is more complicated by the requisite of maintaining financial stability. Increasing competition may be good for efficiency, but bad for financial stability. Some theoretical and empirical results emphasized that more concentrated banking markets are associated with greater risk of bank failures. Various cases provide empirical evidence of a positive relationship between banking market concentration and bank risk-taking. The article examines the empirical nature of the correlation between bank concentration, as an indicator to assess competition, and financial stability, using unique datasets of Albanian banking system.