How does competition affect bank stability after the global crises in the case of the Albanian banking system?

Abstract

This paper addresses the dynamic relationship between competition and bank stability in the Albanian banking system during the period 2008 - 2015. For this reason, we estimate a new composite individual bank stability indicator that  relies on bank balance sheet data. Then, we construct a proxy for bank competition as referred to by the Boone indicator. We also calculated the Lerner index and the efficiency adjusted Lerner Index, as well as the profit elasticity index and the  Herfindahl–Hirschman Index. The main results provide strong supportive evidence for the “competition–stability” view – namely, that lower degree of market power sets banks to less overall risk exposure; results also show that increasing concentration has greater impact on bank fragility. Similarly, bank stability is positively linked to macroeconomic conditions and capital ratio and inversely proportionate to operational efficiency. We also used a quadratic term of the competition indicator to capture a possible non-linear relationship between competition and stability, but found no supportive evidence.