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This paper provides the first empirical analysis of the cross-country relationship between a direct measure of competitive conduct of financial institutions and banking system fragility. Using the Panzar and Rosse H-Statistic as a measure for competition in 38 countries during 1980-2003, we present evidence that more competitive banking systems are less prone to systemic crises and that time to crisis is longer in a competitive environment. Our results hold when concentration and the regulatory environment are controlled for and are robust to different methodologies, different sampling periods, and alternative samples.

Bank management. --- Banks and banking. --- Electronic books. -- local. --- Finance --- Business & Economics --- Banking --- Banks and banking --- Agricultural banks --- Banking industry --- Commercial banks --- Depository institutions --- Management --- Financial institutions --- Money --- Banks and Banking --- Econometrics --- Finance: General --- Macroeconomics --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- General Financial Markets: General (includes Measurement and Data) --- Discrete Regression and Qualitative Choice Models --- Discrete Regressors --- Proportions --- Financial Crises --- Econometrics & economic statistics --- Economic & financial crises & disasters --- Competition --- Logit models --- Systemic crises --- Econometric models --- Financial crises --- United States

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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.

Banks and Banking --- Finance: General --- Financial Risk Management --- Duration Analysis --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Financial Institutions and Services: Government Policy and Regulation --- Production, Pricing, and Market Structure --- Size Distribution of Firms --- General Financial Markets: General (includes Measurement and Data) --- General Financial Markets: Government Policy and Regulation --- Banking --- Financial services law & regulation --- Finance --- Economic & financial crises & disasters --- Capital adequacy requirements --- Competition --- Commercial banks --- Deposit insurance --- Financial regulation and supervision --- Financial markets --- Financial institutions --- Bank soundness --- Financial sector policy and analysis --- Loan loss provisions --- Banks and banking --- Asset requirements --- Crisis management --- State supervision --- Switzerland --- Bank capital --- Econometric models.