Relationship between bank competition and stability: the case of the UK

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There is no consensus in theoretical and empirical studies about the relationship between bank competition and stability. This research aims to investigate the relationship between bank competition and stability in the UK. The analysis has been done on a large sample of UK banks for the period 2004–2014. There is quite contrasting evidence on the bank competition and bank soundness relationship. A unified framework has been developed to assess how different factors may make it more likely that the data favor one theory over another. The results suggest that in some cases a U-shaped relationship exists between bank competition and stability. Therefore the conclusion is that in order to protect the bank from different risk exposures a moderate level of bank competition is needed.

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    • Table 1. Competition and stability measures for the UK banks (total number of banks from the sample equal to 477)
    • Table 2. Models’ regression outcomes
    • Table 3. Market power regression results for HHI deposits