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Bank Competition and Financial Stability: A General Equilibrium Exposition

Author

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  • Gianni De Nicolò
  • Marcella Lucchetta

Abstract

We study the welfare properties of a general equilibrium banking model with moral hazard that encompasses incentive mechanisms for bank risk-taking studied in a large partial equilibrium literature. We show that competitive equilibriums maximize welfare and yield an optimal level of banks’ risk of failure. This result holds even though the risk of failure of competitive banks is higher than that of banks enjoying monopoly rents, and is robust to the introduction of social costs of bank failures. In this model, there is no trade-off between bank competition and financial stability.

Suggested Citation

  • Gianni De Nicolò & Marcella Lucchetta, 2013. "Bank Competition and Financial Stability: A General Equilibrium Exposition," CESifo Working Paper Series 4123, CESifo.
    • Handle: RePEc:ces:ceswps:_4123
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    References listed on IDEAS

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    Cited by:

    1. Iñaki Aldasoro & Leonardo Gambacorta & Paolo Giudici & Thomas Leach, 2023. "Operational and Cyber Risks in the Financial Sector," International Journal of Central Banking, International Journal of Central Banking, vol. 19(5), pages 340-402, December.
    2. Elena Carletti & Agnese Leonello, 2019. "Credit Market Competition and Liquidity Crises," Review of Finance, European Finance Association, vol. 23(5), pages 855-892.
    3. Diallo, Boubacar & Al-Mansour, Abdullah, 2017. "Shadow banking, insurance and financial sector stability," Research in International Business and Finance, Elsevier, vol. 42(C), pages 224-232.
    4. Diallo, Boubacar, 2015. "Bank competition and crises revisited: New results," Economics Letters, Elsevier, vol. 129(C), pages 81-86.
    5. Christoph Bertsch & Mike Mariathasan, 2021. "Optimal bank leverage and recapitalization in crowded markets," BIS Working Papers 923, Bank for International Settlements.
    6. Phurichai Rungcharoenkitkul, 2015. "Bank competition and credit booms," BIS Working Papers 488, Bank for International Settlements.

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    More about this item

    Keywords

    general equilibrium; bank competition; financial stability;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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