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Bank competition and stability in the United Kingdom

Sebastian de-Ramon (), William Francis () and Michael Straughan ()
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Sebastian de-Ramon: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

Authors registered in the RePEc Author Service: Sebastian de Ramon ()

No 748, Bank of England working papers from Bank of England

Abstract: This paper examines the effects of competition on bank stability in the United Kingdom between 1994 and 2013. We construct several measures of competition and test the relationship between competition and bank stability. We find that, on average, competition lowers stability, but that its effect varies across banks depending on the underlying financial health of the institution. Competition encourages relatively less sound banks (closer to insolvency) to reduce costs, lower portfolio risk and increase capital ratios, strengthening their stability, while it lowers the incentives of relatively more sound banks (farther from insolvency) to build capital ratios, weakening their stability. These findings imply trade-offs at the bank-level that may need to be weighed when evaluating policies with consequences for competition.

Keywords: Bank competition; bank stability; Boone indicator; Lerner index. (search for similar items in EconPapers)
JEL-codes: G21 G28 L22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-com
Date: 2018-08-06
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0748

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