The Conditional Impact of Market Consolidation and Market Power on Banking Stability – Evidence from Europe

Employing data on 3,943 banks from the EU-15 between 2013 and 2020, this paper empirically analyzes the relationship between banking market consolidation, market power and banking stability, separately for the loan and deposit market. We initially find that European banks follow a loss-leader pricing strategy and cross-subsidize between both markets. In addition, it is observed that the empirical link between consolidation and market power is weak and thus, provokes diametral findings. Investigating the conditionality of consolidation and market power further reveals that, although the negative impact of consolidation on stability is reduced, it is not fully crowded out, even if banks exhibit stronger market power in the loan and deposit market. Analyzing likely impact channels, different determinants of bank distress as well as effects from the lower bound and negative interest rates regime provides further important insights