Competition and Financial Stability
University of Pennsylvania - Finance Department; European Corporate Governance Institute (ECGI)
Douglas M. Gale
New York University (NYU) - Department of Economics
September 6, 2003
Wharton Financial Institutions Center Working Paper No. 03-26
Competition policy in the banking sector is complicated by the necessity of maintaining financial stability. Greater competition may be good for (static) efficiency, but bad for financial stability. From the point of view of welfare economics, the relevant question is: What are the efficient levels of competition and financial stability? We use a variety of models to address this question and find that different models provide different answers. The relationship between competition and stability is complex: sometimes competition increases stability. In addition, in a second-best world, concentration may be socially preferable to perfect competition and perfect stability may be socially undesirable.
working papers series
Date posted: October 6, 2003
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