Speaker
Description
This paper analyzes the determinants of non-performing loans (NPLs) and banking sector stability based on a panel data of 28 European countries during 2000 to 2019. We employ system GMM estimations and find that bank concentration and market power harm credit quality inducing more risk-taking at lower levels of bank competition, lending support for the competition-stability view. By contrast, increased competition reduces credit risk up to a certain threshold beyond which excessive competition again harms credit quality-competition-fragility view. We employ the Lerner index as an indicator of market concentration. Our findings support the existence of a U-shaped relationship between bank competition and credit risk such that there exists an optimal level of bank competition consistent with the minimal level of NPLs. We control for several macroeconomic and bank-specific indicators, and also confirm the dramatic adverse effect of the global crisis on the credit risks of European banks during 2008-2010 period. Our results suggest that regulatory policy may target an optimal degree of bank competition as an additional channel to promote stability in banking.
Keywords: Non-performing loans, Bank competition, Lerner Index, System GMM Estimation
| Title | CREDIT RISK AND COMPETITIVE BEHAVIOR IN EUROPEAN BANKING DURING 2000-2019 |
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