The Empirical Research Of Bank Concentration And Competition On Bank Stability Under The Perspective Of Financial Regulation

Banking system is of vital importance not only to financial area but also to the whole social economy. When one link on the banking chain sank, the whole society would suffer from economic recession. Bank crises have the characteristics of rapid and wide spreading around the world. In order to prevent or alleviate the damage caused by bank crises, each country makes up regulatory and supervisory policies. The aim of financial regulations is to maintain financial stability. Among all the elements that influence bank stability, bank concentration and competition are widely debated in academics. However, they are still controversial issues. Therefore, analyzing the impact of the two variables on bank stability under the perspective of financial regulation is worthwhile. It can also bring some experiences and suggestions to the future finance reform in China.This thesis studies the direct impact of bank concentration, competition and financial regulation on bank stability. Furthermore, the moderation effects of financial regulation on the relationship between "concentration-stability","competition-stability"’are also discussed. In this thesis and the associated online database, the author uses new data in180countries from1999to2011. The three measures of bank regulatory and supervisory policies are quoted from Barth, Caprio and Levine (2013):they are Overall Restrictions on Banking Activities, Entry into Banking Requirements Denied and Official Supervisory Power.By including time-varying country-fixed effects, the empirical results show that there is a positive relationship between bank concentration and stability. On the other hand, the competition in banking system might decrease bank stability. With enhancement of the intensity of bank regulatory and supervisory policies, overall, bank stability is confirmed increased. This thesis shows a critical role for financial regulation in explaining the variation across countries and over time in the relationship between bank concentration, competition and bank stability and has therefore important policy repercussions. The results also imply the more entry into banking requirements denied, the higher stability in banking system.One concern in the empirical analysis is that bank stability (as measured by the Z-score) and bank competition (as measured by the Boone index) both include the variable of profitability in their numerator. Therefore any positive relationship between the two might thus be mechanical rather than economically meaningful. Thus, Z-score is replaced by bank crisis dummy variable reversely. The robustness checks are conducted using bank crisis dummy variable as explained variable based on Logit model. The result shows that the moderation effect of bank regulation on the relationship between "competition-bank crisis" is still significant. It implies that the positive effect of bank competition on bank crisis is reduced when regulation on banking system is strict. In other works, financial regulation is of quite importance in the whole banking system.