Public policy debates and theoretical disputes motivate this paper’s examination of (i) the
relationship between bank concentration and banking system fragility and (ii) the mechanisms
underlying this relationship. We find no support for the view that concentration increases the
fragility of banks. Rather, banking system concentration is associated with a lower probability that
the country suffers a systemic banking crisis. In terms of policies, we find that (i) regulations and
institutions that facilitate competition in banking are associated with less not more -- banking
system fragility and (ii) including these policy indicators does not change the results on
concentration. This suggests that concentration is a proxy for something else besides the competitive
environment. Also, we do not find that official capital regulations, reserve requirements, or official
prudential regulations lower crises probabilities. Finally, we present suggestive evidence that
concentrated banking systems tend to have larger, better-diversified banks, which may help account
for the positive link between concentration and stability.
*Published: This paper was subsequently published as Bank Concentration and Fragility. Impact and Mechanics, Thorsten Beck, in NBER book The Risks of Financial Institutions (2006)
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