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Competition and financial stability

Author

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  • Franklin Allen
  • Douglas Gale

Abstract

Competition policy in the banking sector is complicated by the necessity of maintaining financial stability. Greater competition may be good for (static) efficiency, but bad for financial stability. From the point of view of welfare economics, the relevant question is: what are the efficient levels of competition and financial stability? We use a variety of models to address this question and find that different models provide different answers. The relationship between competition and stability is complex: sometimes competition increases stability.

Suggested Citation

  • Franklin Allen & Douglas Gale, 2004. "Competition and financial stability," Proceedings, Federal Reserve Bank of Cleveland, pages 453-486.
  • Handle: RePEc:fip:fedcpr:y:2004:p:453-486
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    Keywords

    Bank competition ; Financial crises;

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