Bank Concentration and Fragility

Thorsten Beck, Asli Demirgüç-Kunt and Ross Levine

in The Risks of Financial Institutions

Published by University of Chicago Press

Published in print February 2007 | ISBN: 9780226092850
Published online February 2013 | e-ISBN: 9780226092980 | DOI:
Bank Concentration and Fragility

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This chapter explores the link between bank concentration at the national level and systemic stability. It presents evidence on whether particular hypothesized mechanisms linking concentration and fragility account for the identified relationship between concentration and stability. Bank concentration acts as a proxy for diversification or the cost of monitoring banks. Policies and institutions that facilitate competition in banking are linked with less banking system fragility. Banking crises are more likely in countries with less concentrated banking systems and higher levels of inflation and exchange rate depreciation, and less likely in growing countries with higher gross domestic product (GDP) per capita and higher real interest rates. Banking systems characterized by a few large banks are more stable than less concentrated banking markets. Tighter entry restrictions and more severe regulatory restrictions on bank activities promote bank fragility. Greater bank concentration is connected with a lower likelihood of suffering a crisis.

Keywords: bank concentration; systemic stability; banking system; bank fragility; diversification; banking crises; banking markets

Chapter.  17335 words. 

Subjects: Financial Markets

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