June 25, 2010
Competition and stability in banking
Posted by D. Daniel Sokol
Xavier Vives (IESE Business School) discusses Competition and stability in banking.
ABSTRACT: 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.
June 25, 2010 | Permalink
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