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Competition and Stability in Banking

  • Xavier Vives

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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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 576.

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Date of creation: May 2010
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Handle: RePEc:chb:bcchwp:576
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