IMF Working Papers

Banking Competition and Capital Ratios

ByMartin Cihak, Klaus Schaeck

September 1, 2007

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Martin Cihak, and Klaus Schaeck. "Banking Competition and Capital Ratios", IMF Working Papers 2007, 216 (2007), accessed 12/7/2025, https://doi.org/10.5089/9781451867800.001

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We use data for more than 2,600 European banks to test whether increased competition causes banks to hold higher capital ratios. Employing panel data techniques, and distinguishing between the competitive conduct of small and large banks, we show that banks tend to hold higher capital ratios when operating in a more competitive environment. This result holds when controlling for the degree of concentration in banking systems, inter-industry competition, characteristics of the wider financial system, and the regulatory and institutional environment.

Keywords: asset growth, bank capital, Bank capital ratios, bank competition, bank i., bank ownership structure, bank performance, bank risk, Bank soundness, bank-year observation, banking industry, banking system, banks' capital ratios, capital adequacy ratio, Capital adequacy requirements, Commercial banks, competition, dependent variable, Europe, i. output, Loan loss provisions, market share, market structure, output of bank, regulation, WP