Bank Competition and Financial Stability: A General Equilibrium Exposition
AbstractWe study the welfare properties of a general equilibrium banking model with moral hazard that encompasses incentive mechanisms for bank risk-taking studied in a large partial equilibrium literature. We show that competitive equilibriums maximize welfare and yield an optimal level of banks’ risk of failure. This result holds even though the risk of failure of competitive banks is higher than that of banks enjoying monopoly rents, and is robust to the introduction of social costs of bank failures. In this model, there is no trade-off between bank competition and financial stability.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4123.
Date of creation: 2013
Date of revision:
general equilibrium; bank competition; financial stability;
Find related papers by JEL classification:
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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