Consolidation In Banking And Financial Stability In Europe The Case Of Promoting Cross-Border Bank Mergers

Motivated by recent initial steps of the European Commission fostering cross-border bank mergers within Europe and with regard to possible conflicting objectives of competition policy and banking regulation concerning the bank merger review process, this paper studies the impact of national banking market concentration on financial stability while controlling for macroeconomic, bank-specific, supervisory and institutional factors. Using bank balance sheet data from commercial banks being classified as MFIs across the EU-25 for the period from 1997 to 2005 the authors find that increasing market concentration has a negative impact on financial stability as measured by the Z-score technique derived from DE NICOLÓ (2000).