State-Aid, Stability and Competition in European Banking

Abstract

What is the relationship between bank fragility and competition during a period of market turmoil? Does market power in European banking involve extra-gains after discounting for the cost of government intervention? We answer these questions in the context of Eurozone banking over 2005-2012 and show that greater market power increases bank stability implying aggregate extra-gains of 57% of EU12 gross domestic product for the banking sector after discounting for the costs associated with government intervention. The negative influence of competition on bank stability is non-monotonic and reverses for lower degrees of competition. Capital injections, guarantees and asset relief measures elicit greater bank soundness. JEL-Classification: C23, G21, G28

Cooperative banks: What do we know about competition and risk preferences?

“…The coefficients on our time dummies 6 signal a decrease in stability over time, probably due 2007-2009 global financial crises. Therefore, we may speculate that the margin effect (i.e., increase in competition decreases margins on loans) could take a toll on individual bank stability as high market power may contribute to a build-up of extra-capital buffers to absorb systemic shocks (Fiordelisi et al, 2015), which then in turn could increase individual bank stability in times of crisis. Turning to the results for the loans and deposits market, we notice a positive relationship between loan market power and individual bank stability.…”

Global FDI Inflow and Its Implication across Economic Income Groups

“…The GMM model accounts for serial correlation endogeneity issues inherent in the regression (see Ullah et al 2018;Akande and Kwenda 2017;Saini and Singhania 2018;Van Bon 2019). Buttressing this, Fiordelisi et al (2015) avow that it is necessary to account for endogeneity issues in a regression to avoid issues like reverse simultaneity, causality, and variable omission regardless of the inclusion of a few control variables in the regression. This ensures the validity and robustness of the regression results (see Akande and Kwenda 2017).…”

Competition and stability in the credit industry: Banking vs. factoring industries

“…Firm stability is estimated using two variables: the Z-score and the Capital at Risk (CAR). Competition is estimated using the Lerner Index which is employed extensively in the existing banking literature (Carbò et al, 2009;Cipollini and Fiordelisi, 2012;Fiordelisi and Mare, 2014, Degl'Innocenti et al, 2018, 2019Clark et al, 2018, Fiordelisi, Mare, andMolyneux 2018). We use a panel-data vector auto-regression to examine the link between competition and bank risk measures.…”