BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 12/2009:
How market power influences bank failures: Evidence from Russia
Zuzana Fungacova ()
and Laurent Weill
Abstract: There has been a notable debate in the banking literature
on the impact of bank competition on financial stability. While the
dominant view sees a detrimental impact of competition on the stability of
banks, this view has recently been challenged by Boyd and De Nicolo (2005)
who see the reverse effect. The aim of this paper is to contribute to this
literature by providing the first empirical investigation of the role of
bank competition on the occurrence of bank failures. We analyze this issue
based on a large sample of Russian banks over the period 2001-2007 and
employ the Lerner index as the metric of bank competition. The Russian
banking industry is a unique example of an emerging market which has
undergone a large number of bank failures during the last decade. Our
findings clearly support the view that tighter bank competition is
detrimental for financial stability. This result is robust to tests
controlling for the measurement of market power, the definition of bank
failure, the set of control variables, and the particular linear
specification of the relationship. The normative implication of our
findings is therefore that measures that increase bank competition could
undermine financial stability.
Keywords: bank competition; bank failure; Russia; (follow links to similar papers)
JEL-Codes: G21; P34; (follow links to similar papers)
31 pages, September 10, 2009
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