The Bank Capitalization and the Nonlinear Concentration- Stability Nexus in the Euro Area: The PSTR Approach

Abstract

This study explores the presence of a nonlinear relationship between concentration, indicated by market share, and banking stability, represented by the Z-score, in relation to different levels of bank capitalization, assessed by the capital adequacy ratio in accordance with Basel standards, in the Euro Area countries from 2009 to 2019. By employing the panel smoothing transition regression model, we do not find the statistical significance of the coefficients when bank capitalization is low. However, the concentration-stability paradigm is confirmed when capitalization exceeds the current minimum regulatory requirements. These findings suggest that strengthening bank capitalization is crucial for enhancing stability in the Euro Area banking sector, as higher capitalization enables banks to better withstand negative economic shocks during adverse conditions.