This paper addresses this issue and examines how bank competition affects their stability in the German market. 317 banks are investigated over the period from 2013 to 2019 using panel data estimation models such as the fixed effects and random effects estimator. In order to get a good understanding of the problem and to design an optimal model, the theoretical basics are explained beforehand. In addition, a detailed discussion of how bank competition and stability can be measured is included in the paper. A special focus will be placed on the Lerner index, the H-statistic, and the Boone indicator (competition measures) as well as the Z-score and non-performing loans (stability measures). Previous empirical results and a description of the main characteristics of the German banking market complete the preparation for the model design and implementation, which are discussed and explained in conclusion.
Table of Contents
1 Introduction
2 Theoretical Background
2.1 Charter Value Hypothesis
2.2 The Risk-Shifting Effect
2.3 Correlated Default Risk
2.4 Conclusion on Theoretical Concepts and Empirical Evidence
3 Bank Competition and Stability
3.1 Bank Competition
3.2 Banking Stability
4 German Banking Sector
4.1 Characteristics of the German banking market
4.2 Previous empirical results
5 Empirical Analysis
5.1 Data
5.1.1 Estimate Bank Competition
5.1.2 Estimate Bank Stability
5.2 Findings
6 Conclusion
Objectives and Research Themes
This paper examines the relationship between bank competition and stability within the German banking market, utilizing panel data from 317 banks over the period 2013 to 2019. The research aims to determine how competitive market conditions impact bank stability, specifically testing the validity of the charter value hypothesis and investigating potential non-linear, U-shaped relationships as proposed in economic literature.
- Analysis of bank competition measures (Lerner index, Boone indicator, H-statistic)
- Evaluation of banking stability indicators (Z-score, non-performing loans)
- Investigation of the unique characteristics of the German "three-pillar" banking system
- Application of fixed and random effects panel data estimation models
Book Excerpt
3.1 Bank Competition
Olszak et al. (2013) identify two major streams in the measurement of bank competition in the literature: Market structure measures (such as concentration ratios, number of banks, or the Herfindahl-Hirschmann index (HHI)) and non-structural approaches (such as the Lerner index, Panzar-Rosse H-statistic, and Boone indicator). Although market structure measures are frequently used in the previous research (see Table 1), there are some criticisms of their validity as competition measures. The major drawbacks of them are that they do not consider differences in the ownership structure of banks as well as the line of business. In addition, the competitive behavior at the margin is not considered. Therefore, these measures fail to adequately measure the competitive conduct of banks (Olszak et al. 2013). However, generally, it is easier to retrieve the data for market structure measures and compute them than for non-structural approaches.
Considering the criticism of market structure measures, this work will focus on non-structural approaches to measure bank competition. These approaches aim at estimating competition by applying bank-level data and model-specific assumptions on bank behavior. While most of the recent research seems to focus on the Boone indicator and the Lerner index, we will also discuss the H-statistic’s validity as measurement of bank competition in what follows.
Summary of Chapters
1 Introduction: Provides an overview of the challenges facing the German banking sector, such as digitalization and low interest rates, and defines the research scope.
2 Theoretical Background: Discusses core economic theories, including the charter value hypothesis, risk-shifting, and correlated default risk, while surveying empirical evidence.
3 Bank Competition and Stability: Details the methodologies for measuring bank competition (e.g., Lerner index, Boone indicator) and stability (e.g., Z-score, NPLs).
4 German Banking Sector: Examines the unique three-pillar structure of the German banking industry and reviews previous empirical research specific to this market.
5 Empirical Analysis: Develops the econometric models, describes the data selection process, and presents the empirical findings regarding the relationship between competition and stability.
6 Conclusion: Summarizes the study's primary findings and offers suggestions for future research directions.
Keywords
Bank competition, Financial stability, German banking market, Lerner index, Boone indicator, Z-score, Non-performing loans, Charter value hypothesis, Risk-shifting, Market power, Banking regulation, Panel data analysis, Efficiency, Banking structure, Financial risk.
Frequently Asked Questions
What is the core focus of this research paper?
The paper investigates how bank competition impacts the financial stability of banking institutions operating specifically within the German banking market.
What are the primary indicators used to measure competition and stability?
Competition is measured primarily using the Lerner index and the Boone indicator, while stability is assessed through the Z-score and the ratio of non-performing loans (NPLs).
What is the main objective or research question?
The primary objective is to verify whether increased bank competition leads to greater or lesser financial stability in Germany, testing established economic theories like the charter value hypothesis.
Which methodology is employed in this study?
The study employs panel data estimation models, specifically using fixed effects and random effects estimators based on a dataset of 317 German banks from 2013 to 2019.
What does the main body of the paper cover?
The main body covers a thorough review of theoretical background, structural and non-structural measures of competition, an analysis of the German banking system, and the empirical modeling results.
Which keywords characterize this work?
Key terms include bank competition, Z-score, German banking market, Lerner index, Boone indicator, and financial stability.
Why are the non-structural approaches preferred over traditional market structure measures?
Non-structural approaches are preferred because they account for bank-level data and competitive behavior at the margin, overcoming the limitations of static concentration ratios like the HHI.
What makes the German banking system unique in this analysis?
The German system's "three-pillar" structure—consisting of private commercial, savings, and co-operative banks—presents unique challenges, such as non-profit-oriented motivations, which complicate traditional profit-maximization assumptions used in standard models.
- Arbeit zitieren
- Franz Lennart Wunderlich (Autor:in), 2021, Bank Competition and Stability in the German Banking Market, München, GRIN Verlag, https://www.grin.com/document/1274853
