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Competition, efficiency, and stability in banking

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>2014
<mark>Journal</mark>Financial Management
Issue number1
Number of pages26
Pages (from-to)215-241
Publication StatusPublished
Early online date14/04/13
<mark>Original language</mark>English


We examine the effect of competition on banking stability using a new measure of competition based on the reallocation of profits from inefficient banks to efficient ones. In a sample of European Banks, we find that this measure does capture competition, that competition is stability-enhancing, and that the stability-enhancing effect of competition is greater for healthy banks than for fragile ones. Our results suggest that efficiency is the conduit through which competition contributes to stability and that regulators must condition policy on the health of existing banks.