a b s t r a c t
Using aggregate balance sheet data from banks across the EU-25 over the period from 1997 to 2005 we
provide empirical evidence that national banking market concentration has a negative impact on European
banks’ financial soundness as measured by the Z-score technique while controlling for macroeconomic,
bank-specific, regulatory, and institutional factors. Furthermore, our analysis reveals that
Eastern European banking markets exhibiting a lower level of competitive pressure, fewer diversification
opportunities and a higher fraction of government-owned banks are more prone to financial fragility
whereas capital regulations have supported financial stability across the entire European Union.

André Uhde a,*, Ulrich Heimeshoff b
a Department of Economics, University of Bochum, Germany
b Department of Economics, University of Erlangen-Nuremberg, Germany