Bank stability and economic stability are intimately linked – as the last few years can attest. This column finds that the market, regulatory, and institutional framework in which banks operate has a significant impact on the relationship between bank competition and fragility, with widespread implications for the broader economy.

Issues of banking stability are currently intensively debated in Germany and elsewhere. This column looks at German banks and suggests that privately-owned banks are more profitable and better capitalised than savings and cooperative banks, but also take more risk. This higher risk taking results in higher default probability and higher “proximity to insolvency” of privately-owned banks.