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Competition and stability in banking

  • Vives, Xavier

    ()

    (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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Paper provided by IESE Business School in its series IESE Research Papers with number D/852.

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Length: 58 pages
Date of creation: 05 Apr 2010
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Handle: RePEc:ebg:iesewp:d-0852
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