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Bank Competition and Financial Stability

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Author Info

  • Marcella Lucchetta
  • Gianni De Nicoló

Abstract

We study versions of a general equilibrium banking model with moral hazard under either constant or increasing returns to scale of the intermediation technology used by banks to screen and/or monitor borrowers. If the intermediation technology exhibits increasing returns to scale, or it is relatively efficient, then perfect competition is optimal and supports the lowest feasible level of bank risk. Conversely, if the intermediation technology exhibits constant returns to scale, or is relatively inefficient, then imperfect competition and intermediate levels of bank risks are optimal. These results are empirically relevant and carry significant implications for financial policy.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/295.

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Length: 39
Date of creation: 01 Dec 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/295

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Related research

Keywords: Financial stability; Banks; Economic models; competition; bank risk; market competition; banking; bank competition; bank profits; bank capital; deposit insurance; perfect competition; bankers; bank capitalization; degree of competition; bank intermediation; banking sector; bank profitability; banking model; bank problem; imperfect competition; bank risk taking; bank loan; bank risk-taking; banking industry; capital regulation; barrier to entry; banking systems; bank collects; bank regulation; bank size; bank finances; bank consolidation; banking system stability; banking crises; bank runs; probability of default; bank supervision; bank portfolio; bank stability; risk of bank failure; central banking; bank monitoring; banking system; prudential regulation; banker; bank ownership; banking market; bank failure; bank risks;

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  1. Cerasi, Vittoria & Daltung, Sonja, 2000. "The optimal size of a bank: Costs and benefits of diversification," European Economic Review, Elsevier, vol. 44(9), pages 1701-1726, October.
  2. Elena Loukoianova & Gianni De Nicoló & John H. Boyd, 2009. "Banking Crises and Crisis Dating," IMF Working Papers 09/141, International Monetary Fund.
  3. Cordella, Tito & Levy Yeyati, Eduardo, 1998. "Financial Opening, Deposit Insurance and Risk in a Model of Banking Competition," CEPR Discussion Papers 1939, C.E.P.R. Discussion Papers.
  4. Dell'Ariccia, Giovanni & Marquez, Robert, 2006. "Competition among regulators and credit market integration," Journal of Financial Economics, Elsevier, vol. 79(2), pages 401-430, February.
  5. Martin Cihák & Simon Wolfe & Klaus Schaeck, 2006. "Are More Competitive Banking Systems More Stable?," IMF Working Papers 06/143, International Monetary Fund.
  6. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, December.
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