I use a novel approach to identify the mechanism through which competition affects systemic risk. Using European bank-level data, I show that banks with high market power display higher systemic risk levels. The results are consistent with high market power banks taking correlated investments ex-ante to avoid increases in funding costs ex-post. This increase arises because of the informational contagion from bad news about other banks’ health. Banks trade-off this rise in funding costs and the reduction in margins that results from lending to the same market. I show that the positive effect of market power on systemic risk is stronger for banks more likely to suffer a larger increase in costs due to the informational spillover: more informationally opaque banks, banks financed with a larger share of uninsured sources of funding and in countries with lower deposit insurance coverage.