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Competition-Stability Relationship in the Banking Sector

The goal of the current research is to study the competitionstability relationship in the Latvian banking sector. Research period covers seven years – from 2007 till 2013. The sample consists of 16 Latvian commercial banks. Financial data is extracted from BankScope database. The main method applied to achieve the established goal is a multiple regression analysis. Bank stability is used as a dependent variable and proxied by risk index. To measure the level of competition Lerner index and Boone indicator are calculated. Besides, the consistency between concentration and competition measures is tested applying a correlation analysis. Concentration in the banking sector is measured using Herfindahl-Hirschman Index (HHI) and concentration ratio CR5. Calculations are performed in SPSS environment. The research revealed no statistically significant relationship between the values of Lerner index and Boone indicator estimated for Latvian sample. The hypothesis about the consistency between different competition measures is rejected. In turn, the hypothesis about positive effect of competition on bank soundness is rejected only in the case when competition is proxied by Lerner index. Using Boone indicator as a competition measure, the results are doubtful.