Another look at Bank Consolidation and Financial Stability

In this paper we show that a non-monotonic relationship links certain structural characteristics of the banking market to financial stability, including the number of banks in the market, the branching decisions and branch productivity. Using a non-dynamic panel threshold regression we explain how financial stability is affected by baking market power when market power is subject to one or more regime-switches that characterize a possible non-linear or a threshold effect. The results show that economies with a small number of financial institutions over branched but with a low number of employees per office achieve fewer risk of bank failure. However, such gains are absent in the case of economies with a large number of institutions, where decreases in competition produce a higher risk of financial instability.