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Competition vs. Stability: Oligopolistic Banking System with Run Risk

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  • Mr. Damien Capelle

Abstract

This paper develops a model where large financial intermediaries subject to systemic runs internalize the effect of their leverage on aggregate risk, returns and asset prices. Near the steady-state, they restrict leverage to avoid the risk of a run which gives rise to an accelerator effect. For large adverse shocks, the system enters a zone with high leverage and possibly runs. The length of time the system remains in this zone depends on the degree of concentration through a franchise value, price-drop and recapitalization channels. The speed of entry of new banks after a collapse has a stabilizing effect.

Suggested Citation

  • Mr. Damien Capelle, 2021. "Competition vs. Stability: Oligopolistic Banking System with Run Risk," IMF Working Papers 2021/102, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2021/102
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    Keywords

    franchise value; recapitalization channel; net worth; price-drop channel; real asset; Asset prices; Competition; Shadow banking; Investment banking; Bank deposits; Global;
    All these keywords.

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