Bank Competition and Financial Stability: A General Equilibrium Exposition

December 1, 2011

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Format: Chicago

Marcella Lucchetta, and Gianni De Nicolo. Bank Competition and Financial Stability: A General Equilibrium Exposition, (USA: International Monetary Fund, 2011) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We study versions of a general equilibrium banking model with moral hazard under either constant or increasing returns to scale of the intermediation technology used by banks to screen and/or monitor borrowers. If the intermediation technology exhibits increasing returns to scale, or it is relatively efficient, then perfect competition is optimal and supports the lowest feasible level of bank risk. Conversely, if the intermediation technology exhibits constant returns to scale, or is relatively inefficient, then imperfect competition and intermediate levels of bank risks are optimal. These results are empirically relevant and carry significant implications for financial policy.

Subject: Banking, Competition, Deposit rates, Financial institutions, Financial markets, Financial services, Labor, Loans, Self-employment, Technology

Keywords: Bank capitalization, Bank Competition, Bank risk, Bank-risk taking, Competition, Constant returns to scale, Deposit rates, Financial Stability, General Equilibrium, Intermediation technology, Loans, Self-employment, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/295
Stock No:

WPIEA2011295
ISBN:

9781463927295
ISSN:

1018-5941

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