chapter  1
7 Pages

Introduction JACOBA. BIKKERANDMICHIEL vA NLEUvENSTEIJN

The competition and efficiency of financial institutions have been investigated exhaustively in the economic literature, because of their important role in smoothing consumption of households over time and providing capital to enterprises. In principle, competition is expected to (i) enhance efficiency, and thus to lower prices; (ii) stimulate new innovations; and (iii) open up new financial markets. However, the financial crisis of 2007-2008 has also revealed to policymakers worldwide that the relationship between competition and financial stability is of major importance. On the one hand, competition may enhance financial stability by pushing unstable banks out of the market. On the other, competition is regarded as one of the possible drivers of risk-taking behaviour of banks. Competition may encourage banks to take more risks in order to be more profitable. To be able to assess the impact of competition on banks’ risk-taking behaviour, a good measure of competition is needed. This book aims to contribute precisely to that.