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Competition and Stability in Banking

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  • Xavier Vives

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I review the state of the art of the academic theoretical and empirical literature on the potential trade-off between competition and stability in banking. There are two basic channels through which competition may increase instability: by exacerbating the coordination problem of depositors/investors on the liability side and fostering runs/panics, and by increasing incentives to take risk and raise failure probabilities. The competition-stability trade-off is characterized and the implications of the analysis for regulation and competition policy are derived. It is found that optimal regulation may depend on the intensity of competition.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3050.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3050

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Keywords: antitrust; regulation; crisis; risk-taking; mergers; state aid; bail-outs;

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Cited by:
  1. Luciano Fanti, 2012. "The dynamics of a banking duopoly with capital regulations," Discussion Papers 2012/151, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  2. Beniamino Moro, 2013. "The Run On Repo and the Liquidity Shortage Problems of the Current Global Financial Crisis: Europe vs. The US," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 2(1), pages 41-77, January.
  3. Giancarlo Corsetti & Michael P. Devereux & John Hassler & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2011. "Chapter 5: Taxation and Regulation of the Financial Sector," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 147-169, 02.
  4. Moch, Nils, 2013. "Competition in fragmented markets: New evidence from the German banking industry in the light of the subprime crisis," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2908-2919.
  5. Małgorzata, 2011. "Competition in the Polish banking market prior to recent crisis for the period 1997–2007 – empirical results obtained with the use of three different models," Bank i Kredyt, National Bank of Poland, Economic Institute, vol. 42(5), pages 5-40.
  6. BAICU, Claudia Gabriela, 2010. "Basel Iii – A New Approach To Improve International Financial Stability," Annals of Spiru Haret University, Economic Series, Universitatea Spiru Haret, vol. 1(3), pages 117-123.
  7. Ronald Fischer & Nicolás Inostroza & Felipe J. Ramírez, 2013. "Banking Competition and Economic Stability," Documentos de Trabajo 296, Centro de Economía Aplicada, Universidad de Chile.
  8. Fanti, Luciano, 2014. "The dynamics of a banking duopoly with capital regulations," Economic Modelling, Elsevier, vol. 37(C), pages 340-349.
  9. Tabacco, Giovanni Alberto, 2013. "A new way to assess banking competition," Economics Letters, Elsevier, vol. 121(2), pages 167-169.
  10. Edoardo Gaffeo & Massimo Molinari, 2014. "Macroprudential Consolidation Policy in Interbank Networks," DEM Discussion Papers 2014/01, Department of Economics and Management.
  11. Jean-Sébastien Fontaine & Héctor Pérez Saiz & Joshua Slive, 2012. "When Lower Risk Increases Profit: Competition and Control of a Central Counterparty," Working Papers 12-35, Bank of Canada.

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