Competition and Stability in Banking

By Xavier Vives. Social Science Research Network, 2016

236 citations recorded by the source corpus.

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.

View Paper: https://www.semanticscholar.org/paper/6fbcf26640d6f4f86130c60d7ad0eb2e723f5c9f

Citations in the corpus

• Impact of bank competition on the interest rate pass-through in the euro area (2013, unknown): “At the same time, competition may increase instability through two channels: by exacerbating both the problem of depositor (investor) coordination on the liability side and the risk of panics; and by increasing incentives to take risks, and thus raising the probability of failure (Vives, 2010).”
• Strategic Complementarity, Fragility, and Regulation (2014, unknown): “Vives (2010) shows how the asset fire-sale penalty is increasing in the noise in the signals of the bidders and in the amount auctioned, and decreasing in the number of bidders.”