Determination of Optimal Market Concentration in order to maximize the Stability of the Banking

Banking stability in recent years especially after the financial crisis of 2008-2009, has received more and more attention in policymaking. Although competition is a prerequisite for productivity, technological innovation, institutional development, and financial inclusion, the impact of banking competition on financial stability has been the subject of active debate. in this article, the optimal amount of competition and market concentration to maximize the banking industry's stability is studied. For testing and estimating the relationship between variables, statistics of 170 countries between 1995 to 2017 and the two-step System of Generalized Method of Moments have been used. An inverse U shape relationship resulted between concentration and stability. As the threshold of 0.18 for the Lerner indicator, stability increases with increasing concentration. A greater concentration than the 0.18 threshold will further aggravate banks' individual behavior and may be harmful to the stability of the banking industry. But considering institutional quality makes the relationship between focus and stability U-shaped. After the threshold of the interaction variable of institutional quality and market power, increasing market power increases stability.