Banking Competition and Financial Stability: An Empirical Analysis Using the Boone Indicator

This thesis studies the relationship between banking-sector competition and financial stability, examining whether more competitive banking markets contribute to a more stable or a more fragile financial system. First, the banking competition is studied among its three main determinants which are capital requirements, technology and non-bank financial institutions. The analysis is motivated by the long-standing debate between the two theories: “competition-stability” view which argues that competition reduces bank’s market share and power and encourage efficiency, and the “competition-fragility” view which argues that intense competition may compress profitability and margins and encourage greater risk-taking. For an accurate analysis, the Boone Indicator is the main measurement for banking competition. The Boone indicator is the measure of efficiency of banks with respect to its costs. It’s calculated by the elasticity of market share and operating costs. A more negative Boone indicator implies stronger competition, as banks which lower costs gain a greater competitive advantage. It’s estimated using bank-level data from Orbis across 172 countries from the period between 2000 to 2025. Then, the study examines how this measure is associated with three main determinants of banking competition which are capital requirements, technology, and the presence of non-bank financial institutions, while controlling for macroeconomic and banking-sector characteristics such as private credit, bank concentration, GDP growth, inflation, GDP per capita, and banking crisis episodes. The empirical strategy combines bank-level and country-level analysis. Instrumental variable, two staged regression, Difference-in-Difference and OLS regressions are examined to accurately study the effect of determinants of competition. The Boone Indicator is used in a quantile regression model to assess its relationship with financial stability across countries and over time. Fixed effects are included to account for unobserved differences between countries and common shocks across years, while clustered standard errors are used to improve the reliability of statistical inference. The findings provide evidence that banking competition is an important factor in understanding financial stability, although the relationship is complex and depends on the broader financial and macroeconomic environment. Overall, the thesis contributes to the literature by applying the Boone indicator to a cross-country banking dataset and by linking competition to financial stability in an empirical framework. The results offer useful implications for regulators and policymakers seeking to promote efficient banking markets while maintaining the resilience of the financial system.