Impact of Bank Concentration on Volatility – The Case of European Economies

Abstract

The goal of this paper is to investigate the impact of concentration in the banking sector on the economic and financial stability. Having in mind that the European countries are predominantly bank-centered, we begin with the assumption that too much power concentrated in a small number of financial institutions could have a significant impact on the entire economy. Therefore, our aim is to examine the impact of concentration in the banking sector on the stability of both the financial system and the economy. For the purpose of the study, we have created a sample of 44 European countries, with data covering the period 2000-2021. The methodology involves two econometric techniques: logistic regression and the Generalized Method of Moments procedure to address the problem of possible endogeneity of the data. Using a set of independent variables representing the level of concentration and competition, as well as a set of controlling variables, the results show that the higher concentration of assets among the largest banks has a negative impact on economic stability, while the impact on financial stability is undetermined. The remaining variables show that the countries with higher growth rates and higher capital investments exhibit more stable growth, while the impact of inflation is generally negative.