Market power and stability of CEE banks

Abstract

Background: In spite of growing number of empirical studies, especially after the start of financial crisis, literature fails to provide conclusive answers on the relationship between bank competition and stability. Objective: We contribute to the existing literature by conducting a bank level analysis of market power implications on CEE bank stability and test weather bank market power increases bank stability. Approach: On the sample of 415 CEE banks from 1997-2012, we use Distribution free approach to generate bank specific market power and efficiency indicators and then run a fixed effects panel regression. Results: We find evidence supporting the Competition - fragility view; banks with more market power are more stable. Also, we find evidence that this stability is a result of lower portfolio risk supporting the franchise value channel. Conclusions: For banks in CEE countries where economic crisis increased risk materialization, increasing competition from the early 2000s, may have been a factor decreasing bank stability which may bear significant implications for upcoming years when competition is likely to increase further.