Are competitive banking systems more stable? A comment The changing geography of banking Ancona, September 22, 2006

Main results The Schaeck-Cihak-Wolfe’s paper (SCW) offers – at least - three important results: (1) increase in banking competition  decrease in risk of systemic banking crises (2) banking concentration is not a good proxy for lack of banking competition (3) banking concentration does not  decreasing probability of banking crises.

Empirical evidence Some recent theoretical papers attain these same results (see sec. II of SCW)  Literature = contrasting conclusions. Various case-studies achieve the same results in a given institutional setting. Empirical evidence on (2) and (3) However, first time  robust empirical evidence of (1). General result: “competition-stability view”

Tools Hence: methodology utilized to reach the new evidence  - H-Statistic (cf. Panzar and Rosse) to discriminate: perfect competition (H=1); monopolistic competition (0<H<1); monopoly (H≤0). - Duration analysis (+ logit probability model) to analyze: occurrence and timing of systemic crises.

External criticism SCW acknowledge that: - H-statistic applies to equilibrium - Systemic crisis  substantial bankruptcy of the banking system. Hence: SCW’s theoretical and empirical analysis = either equilibrium or bankruptcy To assess “increase in competition  decrease in risk of systemic crises”  stability v/s market failures not equilibrium v/s bankruptcy. Allen-Gale (2004): multifaceted relationship bw competition and financial stability

External criticism (1) From the theoretical point of view: - Heterogeneous banks  incomplete contracts; - Different indicators (i.e.: bad loans/total assets). From the empirical point of view: - Limits of duration analysis - Markets segmentation.

Minor internal remarks Incomplete measure of competitiveness  constant over the sampling period ( )? Regulatory and supervisory environment  no major changes during this period? Control variables (i.e. foreign exchange rates, real interest rates) v/s institutional setting Concentration into regression equations (multicollinearity)?

Conclusions Very instructive paper; Developments: incomplete contracts, market failures; Few unclear points.