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Competition and Stability in Banking

In: Monetary Policy under Financial Turbulence

  • Xavier Vives

    (IESE Business School)

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 raise failure probabilities. The competition-stability trade-off is characterized and the implications of the analysis for regulation and competition policy are derived. It is found that optimal regulation may depend on the intensity of competition.

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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
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