Competition and Stability in European Banking: A Regional Analysis

National measures of competition and macroeconomic activity have been used by researchers in recent years to explain performance and risk differentials across banks. However, such measures may be inappropriate for banks which operate with a regional focus. In this paper we construct measures of competition and economic activity using regional data to examine bank stability in 11 European countries over the period 2000-2008. The results suggest that a U-shaped relationship exists between regional bank competition and stability. This implies that a moderate level of bank competition is required to keep bank risks at a minimum level. Furthermore, regional economic conditions play a significant role in determining the stabilityof European banks.