We use data for more than 2,600 European banks to test whether
increased competition causes banks to hold higher capital ratios.
Employing panel data techniques, and distinguishing between the competitive
conduct of small and large banks, we show that banks tend to hold
higher capital ratios when operating in a more competitive environment.
This result holds when controlling for the degree of concentration in
banking systems, inter-industry competition, characteristics of the wider
financial system, and the regulatory and institutional environment. 

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