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Bank Competition and Financial Stability : A General Equilibrium Exposition

Author/Editor: Marcella Lucchetta | Gianni De Nicoló
Authorized for Distribution: December 1, 2011
Electronic Access: Free Full Text (PDF file size is 1,358KB)
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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.
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Series: Working Paper No. 11/295
Subject(s): Banks | Economic models | Financial stability
Author's keyword(s): General Equilibrium | Bank Competition | Financial Stability
    Published:   December 1, 2011        
    ISBN/ISSN:   9781463927295/1018-5941   Format:   Paper
    Stock No:   WPIEA2011295   Pages:   39
    Price:   US$18.00
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