Bank Competition and Financial Stability: A General Equilibrium Exposition

34 Pages Posted: 27 Feb 2013

See all articles by Gianni De Nicolo

Gianni De Nicolo

Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)

Marcella Lucchetta

Ca Foscari University of Venice

Date Written: February 27, 2013

Abstract

We study the welfare properties of a general equilibrium banking model with moral hazard that encompasses incentive mechanisms for bank risk-taking studied in a large partial equilibrium literature. We show that competitive equilibriums maximize welfare and yield an optimal level of banks’ risk of failure. This result holds even though the risk of failure of competitive banks is higher than that of banks enjoying monopoly rents, and is robust to the introduction of social costs of bank failures. In this model, there is no trade-off between bank competition and financial stability.

Keywords: general equilibrium, bank competition, financial stability

JEL Classification: D500, G210

Suggested Citation

De Nicolo, Gianni and Lucchetta, Marcella, Bank Competition and Financial Stability: A General Equilibrium Exposition (February 27, 2013). CESifo Working Paper Series No. 4123. Available at SSRN: https://ssrn.com/abstract=2225713

Gianni De Nicolo (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
(410) 234-4507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Marcella Lucchetta

Ca Foscari University of Venice ( email )

Venice
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
95
Abstract Views
570
rank
284,439
PlumX Metrics