The European Central Bank has published a working paper in which the authors find that stronger bank competition is associated with lower subsequent credit risk, but mainly when banks have stronger capital positions. Greater market power is linked to higher credit risk, while stronger capitalization is independently associated with lower risk. The conditioning effect is most robust for Tier 1 and total capital ratios and is also evident when capital is measured as headroom above supervisory requirements. The analysis covers 146 banks across 19 euro area countries from the second quarter of 2020 to the third quarter of 2025, focusing on newly originated loans to nonfinancial corporations. At the 90th percentile of the Tier 1 capital distribution, a one within bank standard deviation increase in competition is associated with reductions of about 77 basis points in both nonperforming loan and Stage 3 ratios and 87 basis points in the default ratio. The authors conclude that competition policy and prudential capital conditions should be assessed jointly, while cautioning that the findings show robust conditional relationships rather than structural causal effects. The paper does not represent the ECB's views.
2026-09-18European Central Bank
European Central Bank working paper finds competition lowers credit risk mainly for banks with stronger capital
A European Central Bank working paper finds that competition is associated with lower subsequent credit risk mainly at banks with stronger capital positions. The effect is most robust for Tier 1 and total capital ratios and for capital headroom above supervisory requirements. The authors argue that competition and prudential capital conditions should be assessed jointly.