Using a sample of 27 banks in Egypt covering the period from 2011 till 2017, the results suggest that the banking sector in Egypt is characterized by monopolistic competition. The findings provide empirical evidence that a higher level of competition increases bank risk-taking and contributes to financial fragility in the absence of banking capital regulations. Further, larger regulatory capital adequacy has the potential to discipline the risk-shifting incentives of banks and protect them against default. Finally, the tradeoff between bank competition and financial stability does not indicate that bank regulators shall give up trying to improve it. In fact, the findings prove that it is possible to maintain a larger regulatory capital ratio to ensure effective competition and financial stability at the same time. This represents the main challenge for bank supervisors and regulators. The findings are robust to alternative measures of bank risk-taking.