Competition and Stability in Banking
45 Pages Posted: 20 May 2010
Date Written: May 2010
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.
Keywords: antitrust, regulation, crisis, risk-taking, mergers, state aid, bail-outs
JEL Classification: G21, G28, L40
Suggested Citation: Suggested Citation