Topic?Does banking sector competition increase instability? In your answer discuss the empirical literature and analyse the main risks influenced by competition.
Please Write main body about 1000 Words follow outline. Use another example to analysis, do not use example from outline and append reference.
In this section, you can begin with a brief description on the nexus between bank competition and financial stability. More specifically, you can focus on the two classic theories (or hypotheses) regarding the relationship between the two concepts: the competition-stability theory and the competition-fragility theory. The former one explains that” competition leads to greater stability. Fiordelisi and Mare (2014, p. 4) indicated that “some papers suggest that higher competition could transform the nature of banking and induce banks to become more relationship-oriented (Boot and Thakor, 2000).”
By contrast, the latter one explains that “a concentrated banking system may decrease risk through an erosion of franchise. In other words, higher bank competition undermines its stability. The assumption behind the positive relationship between concentration and stability is due that competition erodes the franchise value by reducing the monopoly rent and hence encourage bank to take more risk in order to increase returns value” (Kouki and Al-Nasser, 2014, p. 4).
Then, you should present the objectives of this paper.
Finally, you should detail the structure of this essay.
2. Competition-stability vs. competition-fragility
In this section, you should detail and compare the competition-stability hypothesis and the competition-fragility hypothesis, and explain the implications of these two hypotheses in banking.
3. Bank competition and financial stability: empirical evidence
This is the most important section of this essay and you should at least write 2000 words in this section. Specifically, you should exhibit a large number of empirical evidence regarding the two theories, i.e. the competition-fragility theory and the competition-stability theory. For example, “Berger, Rosen and Udell (2007) examine the effect of the change in market structure and competition in the banking industry on the performance and stability of banks. They show that the increased presence of large multi-market banks in a local market significantly lowers loan rates indicating higher competition for small business loans. Using a theoretical framework to analyse competition between large multimarket banks and small local banks, Park and Pennacchi (2009) indicate that large banks are likely to set uniform loan rates across their markets, whereas small banks tend to set rates based on the competitive environment within their respective market. They conclude that competition from the large multimarket banks tends to benefit borrowers but harm depositors. Erel (2011) find that bank mergers, on average, reduce loan spreads and the effect is larger with an acquirer with larger declines in operating costs. However, the spread is larger when the acquirer and target have significant market overlap and increased market power post-merger”.
“De Nicolo et al. (2004) show that a higher level of systemic risk is positively associated with a concentrated banking system. Similarly, De Nicolo and Loukoianova (2006) find a positive and significant relationship between bank concentration and bank risk of failure. The result is even stronger when bank ownership is controlled and strongest when state-owned banks have sizeable market share. In contrast to the above empirical literature, Beck, Demirguc-Kunt and Levine (2006) provide empirical evidence that suggests that increased banking concentration does not result in higher banking system fragility.”
In this section, you are required not only exhibit the findings of the empirical papers, but you are also advised to describe the methodologies used and the datasets used in these papers. In addition, you should also relate these empirical findings to the topic of this essay, this is very important.
The final is a summary of your findings, and you should give your recommendations in this section. You are required to give a brief and summarised discussion relevant to the topic of this paper.