Banking sector concentration, competition and financial stability: the case of the Baltic countries

Juan Cuestas, Yannick Lucotte and Nicolas Reigl

No wp2017-7, Bank of Estonia Working Papers from Bank of Estonia

Abstract: This paper empirically assesses the potential nonlinear relationship between competition and bank risk for a sample of commercial banks in the Baltic countries over the period 2000–2014. Competition is measured by two alternative indexes, the Lerner index and the market share, while we consider the Z-score and loan loss reserves as proxies for bank risk. In line with the theoretical predictions of Martinez-Miera and Repullo (2010), we find an inverse U-shaped relationship between competition and financial stability. This then means that above a certain threshold, the lack of competition is likely to exacerbate the individual risk-taking behaviour of banks, and could be detrimental to the stability of the banking sector in the Baltic countries. The threshold is around 0.60 for the Lerner index, and close to 50% for market share in terms of assets. The policy implications are that the existence of such a threshold suggests that the future evolution of the the structure of the banking industry in these countries is of critical importance. Specifically, this implies that policy-makers should place greater emphasis on mergers and acquisitions to avoid any significant increase of banking sector concentration

Keywords: bank competition; banking sector concentration; market power; Lerner index; financial stability; bank-risk taking; Baltic countries (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 L51 (search for similar items in EconPapers)
Date: 2017-09-11, Revised 2017-09-11
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://dx.doi.org/10.23656/25045520/102016/003710.23656/25045520/72017/0145 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://dx.doi.org/10.23656/25045520/102016/003710.23656/25045520/72017/0145 [301 Moved Permanently]--> https://dx.doi.org/10.23656/25045520/102016/003710.23656/25045520/72017/0145)

Related works:
Journal Article: Banking sector concentration, competition and financial stability: the case of the Baltic countries (2020)
Working Paper: Banking sector concentration, competition and financial stability: the case of the Baltic countries (2020)
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:eea:boewps:wp2017-7

Ordering information: This working paper can be ordered from
Estonia bld. 13, 15095 Tallinn, ESTONIA

Access Statistics for this paper

More papers in Bank of Estonia Working Papers from Bank of Estonia Estonia bld. 13, 15095 Tallinn, ESTONIA. Contact information at EDIRC.
Bibliographic data for series maintained by Peeter Luikmel ().