Competition as a Factor of Systemic Risk in Banking: the Experience of Ukraine

Abstract

The article examines the competitive environment of the Ukrainian banking sector as a factor of systemic risk under conditions of structural transformations and wartime economy. The study considers two opposing theoretical approaches to assessing the relationship between banking competition and financial stability. The competition-fragility hypothesis argues that increasing competition raises systemic risk. The competition-stability hypothesis maintains the opposite position. To assess the level of competition, a structural approach based on the Herfindahl-Hirschman Index and concentration ratios was applied, alongside a non-structural approach based on the Panzar-Rosse H-statistic. Calculations were performed using NBU reporting data for 2010–2025. To verify the methodological validity of the H-statistic, the ROA equilibrium test was applied. This test was proposed by Shaffer (1982) and elaborated by Bikker et al. (2012). It was established that throughout most of the studied period, the Ukrainian banking system operated under conditions of monopolistic competition. At the same time, the ROA test results indicated structural market disequilibrium in most years, which limits the possibility of unambiguous interpretation of the H-statistic and determines its indicative nature. Market equilibrium was confirmed only for two years - 2011 and 2021 - corresponding to stable phases of the system’s development. A comparison of H-statistic dynamics with systemic risk indicators - the share of non-performing loans, return on equity, regulatory capital adequacy ratio, and the number of liquidated banks - revealed a non-linear and business-cycle-dependent relationship between competition and systemic risk. Episodes of competition-fragility were identified in 2013–2014 and 2020–2022, and episodes of competition-stability in 2018–2019 and 2022–2023. The limited informational value of traditional competition indicators under conditions of external shocks, particularly the full-scale invasion of 2022, is substantiated.