Bank Performance during the Financial Crisis 2007-2010

The recent global financial crisis has negatively affected the performance of most banking sectors around the world. A fundamental question is whether those banks located in more concentrated markets were more vulnerable during the crisis or were those that operated in inefficient markets. This paper analyses the impact of bank market structure and efficiency on the profitability and stability of 6540 banks in 49 emerging and advanced countries during the crisis period 2007-2010. We find that market concentration has a negative impact on bank profitability and stability while controlling other factors. Efficiency, on the other hand, improves both the profitability and stability of individual banks during the crisis. These results suggest that, when facing a negative shock, efficient banks perform better. The policy implication is that enhanced competition would contribute to the efficiency and consequently to the sustainability of the banking sector. This in turn suggests that macroprudential authorities should be wary of and vigilant with respect to the possible negative effects of the recent wave of regulations on bank competition.