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Competition and Stability in Banking

  • Xavier Vives T.

In this paper, 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 thus the probability of failure. The competition-stability trade-off is characterized and the implications of the analysis for regulation and competition policy discussed. Optimal regulation may depend on the intensity of competition.

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Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 13 (2010)
Issue (Month): 2 (August)
Pages: 85-112

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Handle: RePEc:chb:bcchec:v:13:y:2010:i:2:p:85-112
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