The impact of market concentration and market power on banking stability – evidence from Europe

Sarah Herwald, Simone Voigt and André Uhde

Journal of Risk Finance, 2024, vol. 25, issue 3, 510-536

Abstract: Purpose - Academic research has intensively analyzed the relationship between market concentration or market power and banking stability but provides ambiguous results, which are summarized under the concentration-stability/fragility view. We provide empirical evidence that the mixed results are due to the difficulty of identifying reliable variables to measure concentration and market power. Design/methodology/approach - Using data from 3,943 banks operating in the European Union (EU)-15 between 2013 and 2020, we employ linear regression models on panel data. Banking market concentration is measured by the Herfindahl–Hirschman Index (HHI), and market power is estimated by the product-specific Lerner Indices for the loan and deposit market, respectively. Findings - Our analysis reveals a significantly stability-decreasing impact of market concentration (HHI) and a significantly stability-increasing effect of market power (Lerner Indices). In addition, we provide evidence for a weak (or even absent) empirical relationship between the (non)structural measures, challenging the validity of the structure-conduct-performance (SCP) paradigm. Our baseline findings remain robust, especially when controlling for a likely reverse causality. Originality/value - Our results suggest that the HHI may reflect other factors beyond market power that influence banking stability. Thus, banking supervisors and competition authorities should investigate market concentration and market power simultaneously while considering their joint impact on banking stability.

Keywords: Market concentration; Market power; Banking stability; European banking; G15; G21; G38 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:jrf-03-2023-0075

DOI: 10.1108/JRF-03-2023-0075

Access Statistics for this article

Journal of Risk Finance is currently edited by Nawazish Mirza

More articles in Journal of Risk Finance from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().