The main messages which emerge from our empirical analysis can be summarized as
follows. An increase in the market power of banks at the level of the individual institution,
measured via (in)efficiency-adjusted Lerner Indexes, tends to reduce the probability of
default of that bank. This result is thus consistent with the majority of theoretical
contributions showing that a reduction in the pricing power of individual banks due to
fiercer competition leads to increasing bank risk. In contrast, our competition measures
applying to the level of the bank market (i.e., measuring competition via geographical
reach and the Boone Indicator at the county and federal state level) tend to indicate that
a more competitive market environment goes hand in hand with a lower level of bank risk.
Thus, when looking upon competition as altering the working mechanism at the (relevant)
market level (which must not necessarily be a one-to-one mapping to the ability of banks
to price products over marginal costs), our evidence supports the recent theoretical and
empirical contributions stressing the transmission channels which lead to a risk-reducing
effect of higher bank competition.