Competition and Financial Stability

Wharton Financial Institutions Center Working Paper No. 03-26

Posted: 6 Oct 2003

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Douglas M. Gale

New York University (NYU) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 6, 2003

Abstract

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.

Suggested Citation

Allen, Franklin and Gale, Douglas M., Competition and Financial Stability (September 6, 2003). Wharton Financial Institutions Center Working Paper No. 03-26. Available at SSRN: https://ssrn.com/abstract=442840

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Douglas M. Gale

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States
(212) 998-8944 (Phone)
(212) 995-3932 (Fax)

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