Thursday, May 26, 2011

Competition and Stability in Banking

Posted by D. Daniel Sokol

Xavier Vives, IESE Business School has an article on 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.

https://lawprofessors.typepad.com/antitrustprof_blog/2011/05/competition-and-stability-in-banking-.html

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