Relationship between bank competition and stability: the case of the UK

There is no consensus in theoretical and empirical studies about the relationship be- tween bank competition and stability. This research aims to investigate the relationship between bank competition and stability in the UK. The analysis has been done on a large sample of UK banks for the period 2004–2014. There is quite contrasting evidence on the bank competition and bank soundness relationship. A unified framework has been developed to assess how different factors may make it more likely that the data favor one theory over another. The results suggest that in some cases a U-shaped relationship exists between bank competition and stability. Therefore the conclusion is that in order to protect the bank from different risk exposures a moderate level of bank competition is needed. on competition. The purpose of this research is to analyze the relationship between bank competition and stability in the UK by underlining the impor-tance of bank competitiveness for the UK banking sector. This will be achieved by looking at the issue in periods from 2004 to 2016: before the financial crisis, prior to the crisis and after the crisis; particularly research will highlight competition in the UK banking sector. The uniqueness of the work is that it looks only at the competition-stabil-ity relationship in the UK banking sector which is different from any other European banking. The difference is its internationality and it follows an Anglo-Saxon banking model that makes competitiveness of the market very important for effective bank performance. Also, a competitive environment in which banks operate might be changed because of the well-developed stock market in the UK. Consequently, For bank stability, determination of the competition in the financial sector and the condition of the economy is likely to play a key role. Researchers in their studies have mainly tended to carry out their assessment by using cross country variables at the international level. In this study research has been provided for banks within the country where the mode of competition and market services are organized at a national level. The examination of the relationship between stability and competition, and their subsequent impact on bank stability in the UK banking industry is important. The study is significant for the banking sector because of the nature of bank models and the economic environment of the UK. Also the results of our study suggest a non-linear relationship between bank competition and stability. The theories of competition-fragility or competition-stability have both received some empirical support using different measures of bank risk and the degree of competition or market power. There have been tested the theories by regressing measures of bank stability and bank competition on several measures of market power, by using bank-level data for 477 banks in the UK. In some cases our results sup-ported the traditional “competition-fragility” view, that banks with a greater degree of market power also enjoy more stability in the market. However, from the empirical results and analysis there is some support for “competition-stability” view that competition between banks enhanced stability in the UK banking industry. So, theoretical models and empirical results for the UK are offering controversial evidence. This study provides important new evidence about the relationship between banks’ specific factors such as net interest margin, total assets and competition, productivity change and stability in the UK banking sector. Specifically, by utilizing a panel data sample of banks one is able to acquire valu-able insights into the banks’ financial products and services. One is also able to analyze the implications of banks’ competition, and thus changes in banking environment, on the relative financial operations of the participants. One of the most important findings from the study is that different banks’ financial