Daway-Ducanes, Sarah Lynne S.Lagac, Joyce Marie P.2024-11-142024-11-142021-07https://selib.upd.edu.ph/etdir/handle/123456789/1352The theoretical and empirical literature on the relationship between competition-financial stability remain inconclusive. The competition-fragility hypothesis argues that greater competition reduces bank profit margins that encourages excessive risk-taking among banks, endangering financial stability (margin effect). Taking a diametrically opposite view, the competition-stability hypothesis asserts that more competition drives down interest rates charged by banks on “safer” loans, reducing the probability of default and thereby promoting financial stability (risk-shifting effect). A third hypothesis forwards for an inverse U-shaped relationship between competition and financial stability: past a critical level of competition, the margin effect starts dominating the risk-shifting. This study investigates the impact of banking competition on the financial stability of banks in the Philippines from 2006-2015. Using two-step system Generalized Method of Moments, the empirical results verify an inverse U-shaped relationship between competition and financial stability, using the Boone indicator for loans as a measure of market competition. Moreover, for at least half of the banks in the sample, less competition results in greater financial stability, providing support to the competition-fragility hypothesis. The study also finds evidence that the Basel III policy has improved the relationship between banking competition and financial stability in the deposit market.enBanking CompetitionFinancial StabilityBank RegulationThesis