The relationship between bank competition and financial stability: a case study of the Mexican banking industry

Abstract

This paper tests both the competition-fragility and competition-stability hypotheses in the Mexican banking sector for the period 2001-2008. In order to account for the degree of competition we use Lerner index, and the Z-index and the ratio of non-performing loans to total loans as proxies of financial stability and bank portfolio risks respectively. The main results indicate there is support for both hypotheses. However, the benefits of greater competition on the overall stability of the system outweigh the increases in bank portfolio risks.