Direct and Indirect Effects of the Concentration on Banking Fragility: Focus on Iranian Banking System

The studies that focus on the relationship between the structure of the banking system and financial stability can be divided into two distinct categories with completely different outcomes. These studies are separated based on their results that the concentration in the banking industry leads to the system fragility (the focus-fragility hypothesis), or in contrast system stability (stabilization focus-stability hypothesis). The aim of the paper is to examine both hypotheses (focus-stability) and (focus-fragility). Accordingly, the direct effect of the concentration on the banking system fragility is tested first by a binary model. This binary model is a function of the bank-specific factors, the industry-specific characteristics, and a set of macroeconomic control variables. First, we estimate the effect of the concentration on the returns on assets and the net interest margin. Then, with forecasting them in a separated regression, we test their effects on bank fragility. According to the results, there is a positive and significant correlation between concentrations on banking stability.