Switching Costs and Financial Stability

28 Pages Posted: 2 Mar 2016 Last revised: 15 Oct 2021

See all articles by Rune Stenbacka

Rune Stenbacka

Hanken School of Economics

Tuomas Takalo

Bank of Finland

Date Written: March 1, 2016

Abstract

We establish that the effect of intensified deposit market competition, measured by reduced switching costs, on the probability of bank failures depends critically on whether we focus on competition with established customer relationships or competition for the formation of such relationships. With inherited customer relationships, intensified competition (i.e., lower switching costs) destabilizes the banking market, whereas it stabilizes the banking market if we shift our focus to competition for the formation of customer relationships. These findings imply that the proportion between new and locked-in depositors is decisively important when determining whether intensified competition destabilizes the banking market or not.

Keywords: deposit market competition, financial stability, bank failures, switching cost, competition versus stability tradeoff

JEL Classification: G21, D43

Suggested Citation

Stenbacka, Rune and Takalo, Tuomas, Switching Costs and Financial Stability (March 1, 2016). Bank of Finland Research Discussion Paper No. 2/2016, Available at SSRN: https://ssrn.com/abstract=2740983 or http://dx.doi.org/10.2139/ssrn.2740983

Rune Stenbacka (Contact Author)

Hanken School of Economics ( email )

P.O. Box 479
Arkadiankatu 22
Helsinki, Helsinki 00101
Finland

Tuomas Takalo

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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