Revisiting the link between systemic risk and competition based on network theory and interbank exposures

Enrique Bátiz-Zuk and Jose Lara

No 2021-26, Working Papers from Banco de México

Abstract: This paper examines the link between bank competition measures and risk indicators using quarterly interbank exposures data for all banks in Mexico during 2008Q1-2019Q1. The classical literature focuses on disentangling the link between competition and individual bank solvency risk. In this paper, we take one step forward in analyzing the relationship between competition and systemic risk. We use counterfactual bank-level contagion risk indicators as a proxy of systemic risk to assess their relationship with traditional competition measures. Our main finding indicates a negative relationship between the bank-level Lerner index and systemic risk. This means that an increase in competition is associated with an increase in systemic risk. Additionally, we find that the implementation of regulatory reform during the period studied does not affect this relationship.

Keywords: Bank competition; systemic risk; financial contagion; financial stability; network models (search for similar items in EconPapers)
JEL-codes: C23 D40 G21 G28 L14 L16 L22 (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-com, nep-net and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:bdm:wpaper:2021-26

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