Consolidation in Banking and Financial Stability in Europe

This paper studies the impact of national banking market concentration on European banks' financial soundness while controlling for macroeconomic, bank-specific, supervisory and institutional factors.Using bank balance sheet data from banks across the EU-25 for the period of 1997-2005 we find that market concentration has a negative impact on banks' financial soundness as measured by the Z-score technique. As we additionally find a negative effect of financial openness on stability despite actual market concentration and throughout all regression specifications, we conclude that rising competition and reducing margins provide an incentive for European banks to accept higher risk exposures