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Bank Market Structure, Competition, and Stability: Issues and Concepts

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The Changing Geography of Banking and Finance

Abstract

A perceived simultaneous increase in consolidation and competition in banking systems around the world has intensified public policy debates on the nexus between consolidation and competition on one hand, and bank soundness on the other hand. In light of these developments, this paper reviews and evaluates the contemporary literature on the effect of structural and nonstructural measures of competition on bank soundness. While the established literature points toward negative trade-offs between competition and bank soundness, this review concludes that recent studies increasingly bolster the view that competition is beneficial for bank stability. This paper starts out with a survey of key studies from the literature on competition, concentration, and soundness. I then provide an assessment of the underlying concepts in the industrial organization literature and review alternatives to the Structure-Conduct-Performance paradigm that dominates the extant literature. Second, I point out several issues that have been widely ignored in contemporary studies but that are critical for public policy recommendations. Finally, I suggest some avenues for future research.

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Notes

  1. 1.

    Note that the terms “stability” and “soundness” are used interchangeably in this chapter.

  2. 2.

    For an overview of concentration and competition in European banking see Staikouras and Koutsomanoli-Fillipaki (2006), and Bikker and Haaf (2002) for a world-wide sample.

  3. 3.

    The earlier literature on competition and stability is treated in detail by Carletti and Hartmann (2003).

  4. 4.

    The k-bank concentration ratios are the general way of referring to the ratio of the assets (or deposits) held by a certain number of banks to total assets (or deposits) in the banking system. Empirical studies usually assume k = 3 or k = 5.

  5. 5.

    As one observer noted recently, “conduct matters, but structure doesn’t”.

  6. 6.

    For an application see Schaeck and Cihak (2007) and Schaeck et al. (2009).

  7. 7.

    Note that failure is a regulator-induced process that may occur prior to a bank becoming technically insolvent. For instance, the Federal Deposit Insurance Corporation Improvement Act (1991) in the United States contains guidelines for prompt corrective action that require a bank being placed in receivership if its ratio of tangible equity to total assets falls to or below 2 percent.

  8. 8.

    Note that Gan (2004) uses the ratios of real estate and brokered deposits to total assets as proxies for risk. However, this study is concerned with risk taking in thrift institutions that have very different business profiles in comparison to commercial banks and I therefore refrain from classifying these variables as measures of bank soundness.

  9. 9.

    See Cihak (2007) for an in-depth analysis of measures of systemic risk.

  10. 10.

    For detailed reviews see Bikker (2004), Carbo et al. (2009), and Berger et al. (2004).

  11. 11.

    See Bankstellenstatistik, Deutsche Bundesbank, accessed on February15 2007, available on http://www.bundesbank.de/download/presse/pressenotizen/2006/20060413.bankstellennetz.pdf.

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Acknowledgments

I would like to thank Martin Cihak for his valuable comments and suggestions. Outstanding editorial assistance was provided by Thanh Van Nguyen and Watcharee Corkill.

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  1. Bangor Business School, University of Wales, Hen Goleg, College Road, Bangor, LL57 2DG, UK

    Klaus Schaeck

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    Schaeck, K. (2009). Bank Market Structure, Competition, and Stability: Issues and Concepts. In: Zazzaro, A., Fratianni, M., Alessandrini, P. (eds) The Changing Geography of Banking and Finance. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-98078-2_7

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