The relationship between bank competition and financial stability: a case study of the Mexican banking industry

Main Article Content

Raúl Osvaldo Fernández
Jesús G. Garza-García

Abstract

This paper tests both the competition-fragility and competition-stability hypotheses in the Mexican banking sector for the period 2001-2008. In order to account for the degree of competition we use Lerner index, and the Z-index and the ratio of non-performing loans to total loans as proxies of financial stability and bank portfolio risks respectively. The main results indicate there is support for both hypotheses. However, the benefits of greater competition on the overall stability of the system outweigh the increases in bank portfolio risks. 

Downloads

Download data is not yet available.

Metrics

Metrics Loading ...

Article Details

How to Cite
Fernández, R. O., & Garza-García, J. G. (2015). The relationship between bank competition and financial stability: a case study of the Mexican banking industry. Ensayos Revista De Economía (Ensayos Journal of Economics), 34(1), 103–120. Retrieved from https://ensayos.uanl.mx/index.php/ensayos/article/view/23
Section
Articles
Author Biographies

Raúl Osvaldo Fernández, Banco de México

Financial Researcher, Directorate of Financial Stability, Banco de México. Address: Ave. 5 de mayo # 1 piso 1, Del. Cuauhtémoc, México, D.F. Phone: + 52 (55)52372000, ext. 3252

Jesús G. Garza-García, Itaú BBA

Chief Mexico Economist, Itaú BBA. Address:  Avenida Santa Fé 462, Piso 14, Col. Santa Fé, Del. Cuajimalpa, CP. 05438, Mexico City. Phone: +52 (55)41618908.

References

Aigner, D., Lovell, C. A. K., and Schmidt, P. (1977). “Formulation and Estimation of Stochastic Frontier Production Function Models”. Journal of Econometrics, 6, 21-37.

Baltagi, B. H. (2008). Econometric Analysis of Panel Data. 4th edition, Chichester: John Wiley and Sons Ltd.

Beck, T. (2008). “Bank competition and financial stability: Friends or foes?”. World Bank Policy Research Working Paper No. 4656.

Beck, T., De Jonghe, O., and Schepens, G. (2010). “Bank Competition and Stability: Reconciling Conflicting Empirical Evidence”. Cass Business School Working Paper.

Beck, T., Demirguc-Kunt, A., and Levine, R. (2006). “Bank concentration, competition, and crises: First results”. Journal of Banking and Finance, 30(5), 1581-1603.

Berger, A., Klapper, L., and Turk-Ariss, R. (2008). “Bank competition and financial stability.” World Bank Policy Research Working Paper No. 4696.

Boyd, J., and De Nicolo, G. (2005) “The theory of bank risk taking revisited”. Journal of Finance, 60(3), 1329-1343.

Boyd, J., De Nicolo, G., and Jalal, A. M. (2006). “Bank risk taking and competition revisited: New theory and evidence”. IMF Working Paper No. 297.

Carletti, E. and Hartmann, P. (2002). “Competition and financial stability: What’s special about banking?”. ECB Working Paper No. 146.

Cihak, M., Maechler, A., Schaeck, K., and Stolz, S. (2009). “Who disciplines bank managers?”. IMF Working Paper Series No. 272.

Claessens, S., and Laeven, L. (2004). “What drives competition? Some international evidence”. Journal of Money, Credit and Banking, 36(3), 563-583.

De Nicolo, G., and Loukoianovam, E. (2006). “Bank ownership, market structure, and risk”. IMF Working Paper No.215.

Guerrero, R. and Villalpando, M. (2009). “Rentabilidad, concentración y eficiencia en el sistema bancario mexicano”. El Trimestre Económico, 76(1), 237-263.

Guerrero, R. and Negrin, J. L. (2006) “Eficiencia del sistema bancário mexicano 1997-2004: uma estimación dinâmica.” Monetaria, Centro de Estudios Monetarios Latinoamericanos, 0(3), pp. 235-259.

Hellmann, T. F., Murdock, K., and Stiglitz, J. (2000). “Liberalization, moral hazard in banking and prudential regulation: Are capital requirements enough?”. American Economic Review, 90(1), 147-165.

Hernandez-Murillo, R. (2007). “Experiments in financial liberalization: The Mexican banking industry”. Federal Reserve Bank of St. Louis Review, 89(5), 415-432.

Jimenez, G., Lopez, J., and Saurina, J. (2007). “How does competition impact bank risk taking?”. Banco de España Working Papers No. 1005.

Keeley, M. (1990). “Deposit insurance, risk and market power in banking”. American Economic Review, 80(5), 1183-1200.

Liu, H., Molyneux, P., and Wilson, J., (2013). “Competition and stability in European banking: A regional analysis”. Manchester School, 81(2), 176-201.

Marcus, A. J. (1984). “Deregulation and bank financial policy”. Journal of Banking and Finance, 8(4), 557-565.

Molyneux, P., and Nguyen-Linh, H. (2008). “Competition and risk in the South East Asian banking”. Bangor Business School Working Paper, Bangor, Wales.

Ruiz-Porras, A., Vasquez-Quevedo, N., and Nuñez Mora, J. A. (2006). “Efectos de la globalización financiera en la administración y regulación de riesgos bancarios en México”. Contaduría y Administración, 219, 115-141.

Ruiz-Porras, A. (2008). “Banking competition and financial fragility: Evidence from panel-data.” Estudios Economicos, 23(1), 49-87.

Schaeck, K., Cihak, M., and Wolfe, S. (2006). “Are more competitive banking systems more stable?”. IMF Working Paper No. 143.

Turk-Ariss, R. (2010). “On the implications of market power in banking: Evidence from developing countries”. Journal of Banking and Finance, 34(4), 765-775.

Vives, X. (2010). “Competition and stability in banking”. IESE Working Paper No. 852.

Yacaman, J. M. (2001). “Competition and consolidation in the Mexican banking industry after the 1995 crisis in the banking industry in the emerging economies: Competition, consolidation and systemic stability”. BIS papers No. 4.