Bank Concentration and Fragility: Impact and Mechanics

   (351 K)

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:

• Carey, Mark and Rene Stulz (eds.) The Risk of Financial Institutions. Chicago: University of Chicago Press, 2006. ,
• Bank Concentration and Fragility. Impact and Mechanics, Thorsten Beck, in The Risks of Financial Institutions (2006), University of Chicago Press
  

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