The effect of bank competition on bank performance

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Abstract

In this thesis I examine the impact of concentration in the banking sector using a sample of 21,240 banks from 101 countries during the 2001-2012 period. Competition in this sector is an important subject of public debate. Profitability and stability of banking institutions are two important fields influenced by competitive forces from the banking sector. Regulatory and monitoring institutions often believe that competition is a detrimental factor to bank stability. I find that stability increases when concentration increases in highincome countries, while an opposite relation can be observed in countries with lower income. Concentration is also related to the level of profitability. There might be a fear that an increase in concentration may be favorable to banks which could see their profits increase due to their growing market power. However, this is not necessarily the case, as the results in this thesis show. I find a negative relation between concentration and profitability of banks. However, banks from Scandinavian Law countries exhibit a different pattern from this point of view. This thesis will extensively examine on one hand the relation between competition and profitability of banks and on the other hand the extent to which stability and competition are related to each other, under the important assumption that concentration and competition are positively related to each other. Keywords: competition, Herfindahl, return on assets, stability, panel data