Bank Competition and Financial Stability: A General Equilibrium Exposition
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.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo.de
More information through EDIRC
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.:
- 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.
- Besanko, David & Kanatas, George, 1993. "Credit Market Equilibrium with Bank Monitoring and Moral Hazard," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 213-32.
- 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.
- Cordella, Tito & Yeyati, Eduardo Levy, 2002. "Financial opening, deposit insurance, and risk in a model of banking competition," European Economic Review, Elsevier, vol. 46(3), pages 471-485, March.
- Elena Loukoianova & Gianni De NicolÃ³ & John H. Boyd, 2009.
"Banking Crises and Crisis Dating: Theory and Evidence,"
IMF Working Papers
09/141, International Monetary Fund.
- John Boyd & Gianni De Nicolò & Elena Loukoianova, 2010. "Banking Crises and Crisis Dating: Theory and Evidence," CESifo Working Paper Series 3134, CESifo Group Munich.
- Kwangwoo Park & George Pennacchi, 2007.
"Harming depositors and helping borrowers: the disparate impact of bank consolidation,"
0704, Federal Reserve Bank of Cleveland.
- Kwangwoo Park & George Pennacchi, 2009. "Harming Depositors and Helping Borrowers: The Disparate Impact of Bank Consolidation," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 1-40, January.
- Cerasi, Vittoria & Daltung, Sonja, 2000.
"The optimal size of a bank: Costs and benefits of diversification,"
European Economic Review,
Elsevier, vol. 44(9), pages 1701-1726, October.
- V. Cerasi & S. Daltung, 1995. "The Optimal Size of a Bank: Costs and Benefits of Diversification," Departmental Working Papers 1995-05, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
- Matutes, Carmen & Vives, Xavier, 1996. "Competition for Deposits, Fragility, and Insurance," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 184-216, April.
- Holmström, Bengt & Tirole, Jean, 1994.
"Financial Intermediation, Loanable Funds and the Real Sector,"
IDEI Working Papers
40, Institut d'Économie Industrielle (IDEI), Toulouse.
- Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
- Bengt Holmstrom & Jean Tirole, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," Working papers 95-1, Massachusetts Institute of Technology (MIT), Department of Economics.
- Morrison, Alan & White, Lucy, 2004.
"Crises and Capital Requirements in Banking,"
CEPR Discussion Papers
4364, C.E.P.R. Discussion Papers.
- Bruce D. Smith & Gianni De NicolÃ³ & John H. Boyd, 2003.
"Crisis in Competitive Versus Monopolistic Banking Systems,"
IMF Working Papers
03/188, International Monetary Fund.
- John H. Boyd & Gianni De Nicoló & Bruce D. Smith, 2004. "Crises in competitive versus monopolistic banking systems," Proceedings, Federal Reserve Bank of Cleveland, pages 487-509.
- Boyd, John H & De Nicolo, Gianni & Smith, Bruce D, 2004. "Crises in Competitive versus Monopolistic Banking Systems," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 487-506, June.
- Gianni De NicolÃ³ & Marcella Lucchetta, 2009.
"Financial Intermediation, Competition, and Risk: A General Equilibrium Exposition,"
IMF Working Papers
09/105, International Monetary Fund.
- Di Nicolo, G. & Lucchetta, M., 2010. "Financial Intermediation, Competition, and Risk : A General Equilibrium Exposition," Discussion Paper 2010-67S, Tilburg University, Center for Economic Research.
- 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.
- Martin CihÃ¡k & Simon Wolfe & Klaus Schaeck, 2006. "Are More Competitive Banking Systems More Stable?," IMF Working Papers 06/143, International Monetary Fund.
- Rafael Repullo & David Martínez-Miera, 2008.
"Does Competition Reduce The Risk Of Bank Failure?,"
- Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, June.
- Dell'Ariccia, Giovanni & Marquez, Robert, 2006. "Competition among regulators and credit market integration," Journal of Financial Economics, Elsevier, vol. 79(2), pages 401-430, February.
- Gianni De Nicoló & Giovanni Favara & Lev Ratnovski, 2012. "Externalities and Macroprudential Policy," IMF Staff Discussion Notes 12/05, International Monetary Fund.
- Alan D. Morrison & Lucy White, 2005. "Crises and Capital Requirements in Banking," American Economic Review, American Economic Association, vol. 95(5), pages 1548-1572, December.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_4123. 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: (Julio Saavedra)
If references are entirely missing, you can add them using this form.