IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this book chapter or follow this series

Competition and Stability in Banking

In: Monetary Policy under Financial Turbulence

  • Xavier Vives

    (IESE Business School)

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.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://si2.bcentral.cl/public/pdf/banca-central/pdf/v16/Vol16_455-502.pdf
Download Restriction: no

as
in new window

This chapter was published in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.) Monetary Policy under Financial Turbulence, , chapter 12, pages 455-502, 2011.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v16c12pp455-502.
Handle: RePEc:chb:bcchsb:v16c12pp455-502
Contact details of provider: Postal:
Casilla No967, Santiago

Phone: (562) 670 2000
Fax: (562) 698 4847
Web page: http://www.bcentral.cl/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Barth, James R. & Caprio Jr., Gerard & Levine, Ross, 2001. "Bank regulation and supervision : what works best?," Policy Research Working Paper Series 2725, The World Bank.
  2. Huberto M. Ennis & Todd Keister, 2009. "Bank Runs and Institutions: The Perils of Intervention," American Economic Review, American Economic Association, vol. 99(4), pages 1588-1607, September.
  3. Jack High (ed.), 2001. "Competition," Books, Edward Elgar, number 1751.
  4. 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.
  5. Takeo Hoshi & Anil Kashyap, 1999. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," NBER Working Papers 7250, National Bureau of Economic Research, Inc.
  6. Gianni De Nicoló & Myron L. Kwast, 2002. "Systemic Risk and Financial Consolidation: Are they Related?," IMF Working Papers 02/55, International Monetary Fund.
  7. Joseph P. Hughes & William W. Lang & Loretta J. Mester & Choon-Geol Moon, 1996. "Efficient banking under interstate branching," Working Papers 96-9, Federal Reserve Bank of Philadelphia.
  8. Franklin Allen & Anthony M. Santomero, 1999. "What Do Financial Intermediaries Do?," Center for Financial Institutions Working Papers 99-30, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. Baele, Lieven & De Jonghe, Olivier & Vander Vennet, Rudi, 2007. "Does the stock market value bank diversification?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1999-2023, July.
  10. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc.
  11. Franklin Allen & Douglas Gale, 2004. "Competition and financial stability," Proceedings, Federal Reserve Bank of Cleveland, pages 453-486.
  12. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Rochet, Jean-Charles & Vives, Xavier, 2004. "Coordination Failures and the Lender of Last Resort : Was Bagehot Right After All?," IDEI Working Papers 294, Institut d'Économie Industrielle (IDEI), Toulouse.
  14. Repullo, Rafael, 2003. "Capital Requirements, Market Power and Risk-Taking in Banking," CEPR Discussion Papers 3721, C.E.P.R. Discussion Papers.
  15. David Martinez-Miera & Rafael Repullo, 2010. "Does Competition Reduce the Risk of Bank Failure?," Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3638-3664, October.
  16. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
  17. John H. Boyd & Mark Gertler, 1993. "U.S. Commercial Banking: Trends, Cycles, and Policy," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 319-377 National Bureau of Economic Research, Inc.
  18. Matutes, Carmen & Vives, Xavier, 1995. "Imperfect Competition, Risk Taking, and Regulation in Banking," CEPR Discussion Papers 1177, C.E.P.R. Discussion Papers.
  19. Berger, Allen N. & Klapper, Leora F. & Udell, Gregory F., 2001. "The ability of banks to lend to informationally opaque small businesses," Policy Research Working Paper Series 2656, The World Bank.
  20. Douglas Gale & Xavier Vives, 2001. "Dollarization, bailouts, and the stability of the banking system," Proceedings 729, Federal Reserve Bank of Chicago.
  21. Matutes, Carmen & Vives, Xavier, 1996. "Competition for Deposits, Fragility, and Insurance," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 184-216, April.
  22. Claessens, Stijn, 2006. "Competitive implications of cross-border banking," Policy Research Working Paper Series 3854, The World Bank.
  23. Xavier Vives, 2011. "Competition policy in banking," Oxford Review of Economic Policy, Oxford University Press, vol. 27(3), pages 479-497.
  24. Salas, Vicente & Saurina, Jesus, 2003. "Deregulation, market power and risk behaviour in Spanish banks," European Economic Review, Elsevier, vol. 47(6), pages 1061-1075, December.
  25. Klaus Schaeck & Martin Cihak & Simon Wolfe, 2009. "Are Competitive Banking Systems More Stable?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 711-734, 06.
  26. Perotti, Enrico C. & Suarez, Javier, 2002. "Last bank standing: What do I gain if you fail?," European Economic Review, Elsevier, vol. 46(9), pages 1599-1622, October.
  27. Gianni De Nicolo & Elena Loukoianova, 2007. "Bank ownership, market structure, and risk," Proceedings 1058, Federal Reserve Bank of Chicago.
  28. Dell'Ariccia, Giovanni, 2001. "Asymmetric information and the structure of the banking industry," European Economic Review, Elsevier, vol. 45(10), pages 1957-1980, December.
  29. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," CEMA Working Papers 595, China Economics and Management Academy, Central University of Finance and Economics.
  30. Honkapohja, Seppo, 2009. "The 1990’s financial crises in Nordic countries," Research Discussion Papers 5/2009, Bank of Finland.
  31. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  32. Gary Gorton, 1986. "Banking panics and business cycles," Working Papers 86-9, Federal Reserve Bank of Philadelphia.
  33. Postlewaite, Andrew & Vives, Xavier, 1987. "Bank Runs as an Equilibrium Phenomenon," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 485-91, June.
  34. Gilbert,Christopher L. & Vines,David (ed.), 2006. "The World Bank," Cambridge Books, Cambridge University Press, number 9780521029018, 1.
  35. Lawrence J. White, 2009. "Financial Regulation and the Current Crisis: A Guide for the Antitrust Community," Working Papers 09-11, New York University, Leonard N. Stern School of Business, Department of Economics.
  36. Gabriel Jiménez & Jose A. Lopez & Jesús Saurina, 2010. "How Does Competition Impact Bank Risk-Taking?," Banco de Espa�a Working Papers 1005, Banco de Espa�a.
  37. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  38. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  39. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn.
  40. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  41. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
  42. Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market liquidity and funding liquidity," LSE Research Online Documents on Economics 24478, London School of Economics and Political Science, LSE Library.
  43. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 407-443.
  44. Glick,Reuven & Moreno,Ramon & Spiegel,Mark M. (ed.), 2001. "Financial Crises in Emerging Markets," Cambridge Books, Cambridge University Press, number 9780521800204, 1.
  45. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
  46. Vives, Xavier, 2009. "Asset auctions, information and liquidity," IESE Research Papers D/837, IESE Business School.
  47. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  48. Stephen Morris & Hyun Song Shin, 2001. "Coordination risk and the price of debt," LSE Research Online Documents on Economics 25046, London School of Economics and Political Science, LSE Library.
  49. Franklin R. Edwards & Frederic S. Mishkin, 1995. "The decline of traditional banking: implications for financial stability and regulatory policy," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 27-45.
  50. Allen Berger & Leora Klapper & Rima Turk-Ariss, 2009. "Bank Competition and Financial Stability," Journal of Financial Services Research, Springer, vol. 35(2), pages 99-118, April.
  51. Gehrig, Thomas, 1998. "Screening, cross-border banking, and the allocation of credit," Research in Economics, Elsevier, vol. 52(4), pages 387-407, December.
  52. Philippe Madi�s, 2006. "An Experimental Exploration of Self-Fulfilling Banking Panics: Their Occurrence, Persistence, and Prevention," The Journal of Business, University of Chicago Press, vol. 79(4), pages 1831-1866, July.
  53. DellAriccia, Giovanni & Igan, Deniz & Laeven, Luc, 2008. "Credit Booms and Lending Standards: Evidence From The Subprime Mortgage Market," CEPR Discussion Papers 6683, C.E.P.R. Discussion Papers.
  54. Smith, Bruce D., 1984. "Private information, deposit interest rates, and the `stability' of the banking system," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 293-317, November.
  55. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
  56. Elena Loukoianova & Gianni De Nicoló & John H. Boyd, 2009. "Banking Crises and Crisis Dating: Theory and Evidence," IMF Working Papers 09/141, International Monetary Fund.
  57. Galloway, Tina M. & Lee, Winson B. & Roden, Dianne M., 1997. "Banks' changing incentives and opportunities for risk taking," Journal of Banking & Finance, Elsevier, vol. 21(4), pages 509-527, April.
  58. Rocco Huang & Lev Ratnovski, 2009. "Why Are Canadian Banks More Resilient?," IMF Working Papers 09/152, International Monetary Fund.
  59. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
  60. Garratt, Rod & Keister, Todd, 2009. "Bank runs as coordination failures: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 300-317, August.
  61. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates
    [This Time Is Different: Eight Centuries of Financial Folly]
    ," Introductory Chapters, Princeton University Press.
  62. Randall S. Kroszner & Philip E. Strahan, 1999. "What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1437-1467.
  63. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-92, June.
  64. Acharya, Viral V & Gromb, Denis & Yorulmazer, Tanju, 2008. "Imperfect Competition in the Inter-Bank Market for Liquidity as a Rationale for Central Banking," CEPR Discussion Papers 6984, C.E.P.R. Discussion Papers.
  65. Vives, Xavier, 2004. "Complementarities and Games: New Developments," CEPR Discussion Papers 4742, C.E.P.R. Discussion Papers.
  66. Astrid A. Dick, 2007. "Market Size, Service Quality, and Competition in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 49-81, 02.
  67. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06.
  68. Xavier Vives, 2006. "Banking and Regulation in Emerging Markets: The Role of External Discipline," World Bank Research Observer, World Bank Group, vol. 21(2), pages 179-206.
  69. Jayaratne, Jith & Strahan, Philip E, 1998. "Entry Restrictions, Industry Evolution, and Dynamic Efficiency: Evidence from Commercial Banking," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 239-73, April.
  70. Roberto Chang & Andres Velasco, 2001. "A Model of Financial Crises in Emerging Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 489-517.
  71. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
  72. Allen N. Berger & Rebecca Demsetz & Philip E. Strahan, 1998. "The consolidation of the financial services industry: causes, consequences, and implications for the future," Finance and Economics Discussion Series 1998-46, Board of Governors of the Federal Reserve System (U.S.).
  73. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
  74. Caminal, Ramon & Matutes, Carmen, 2002. "Market power and banking failures," International Journal of Industrial Organization, Elsevier, vol. 20(9), pages 1341-1361, November.
  75. Vives, Xavier, 1990. "Deregulation and competition in Spanish banking," European Economic Review, Elsevier, vol. 34(2-3), pages 403-411, May.
  76. Enrica Detragiache & Poonam Gupta & Thierry Tressel, 2006. "Foreign Banks in Poor Countries: Theory and Evidence," IMF Working Papers 06/18, International Monetary Fund.
  77. Alonso, Irasema, 1996. "On avoiding bank runs," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 73-87, February.
  78. Lawrence Sáez & Xianwen Shi, 2004. "Liquidity Pools, Risk Sharing, and Financial Contagion," Journal of Financial Services Research, Springer, vol. 25(1), pages 5-23, February.
  79. Harald Hau & Marcel Thum, 2009. "Subprime crisis and board (in-) competence: private versus public banks in Germany," Economic Policy, CEPR;CES;MSH, vol. 24, pages 701-752, October.
  80. Harold L. Cole & Lee E. Ohanian, 2004. "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 779-816, August.
  81. De Nicolo, Gianni & Kwast, Myron L., 2002. "Systemic risk and financial consolidation: Are they related?," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 861-880, May.
  82. Xavier Vives, 2001. "Competition in the Changing World of Banking," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 535-547.
  83. John H. Boyd & Gianni De Nicolã, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, 06.
  84. Allen N. Berger & Anil K. Kashyap & Joseph M. Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trips It's Been," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 55-218.
  85. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
  86. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
  87. Franklin Allen & Douglas Gale, 1976. "Optimal Financial Crises," Center for Financial Institutions Working Papers 97-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  88. Rebecca Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 1-14.
  89. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
  90. Corsetti, Giancarlo & Guimarães, Bernardo & Roubini, Nouriel, 2004. "International Lending of Last Resort and Moral Hazard: A Model of the IMF's Catalytic Finance," CEPR Discussion Papers 4383, C.E.P.R. Discussion Papers.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:chb:bcchsb:v16c12pp455-502. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.