Clarifying the Concentration-Stability Controversy in Banking : Evidence from the EU-25

We use panel data from the EU-25 to estimate the effect of changes in the degree of banking market concentration on the stability of banks by performing separate analyses at the country level and the bank level. The results indicate that the level of analysis matters. Whereas our country-level analysis suggests a negative relationship between market concentration and stability, the sign of the estimated effect is reversed when the analysis is performed at the bank level. We argue that the latter approach is more appropriate because it focuses solely on the within-bank variation in stability and because it allows to control for bank-specific characteristics and unobserved bank heterogeneity. The evidence partly supports the view that increases in the degree of banking market concentration