Competition and financial stability

Franklin Allen, Douglas Gale

    Research output: Contribution to journalArticlepeer-review

    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.

    Original languageEnglish (US)
    Pages (from-to)453-480
    Number of pages28
    JournalJournal of Money, Credit and Banking
    Volume36
    Issue number3 II
    DOIs
    StatePublished - Jun 2004

    Keywords

    • Banking concentration
    • Crises
    • Dynamic
    • Schumpeterian competition
    • Spatial

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics

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