Competition vs. Stability: Oligopolistic Banking System with Run Risk

Author/Editor:

Damien Capelle

Publication Date:

April 23, 2021

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

This paper develops a model where large financial intermediaries subject to systemic runs internalize the effect of their leverage on aggregate risk, returns and asset prices. Near the steady-state, they restrict leverage to avoid the risk of a run which gives rise to an accelerator effect. For large adverse shocks, the system enters a zone with high leverage and possibly runs. The length of time the system remains in this zone depends on the degree of concentration through a franchise value, price-drop and recapitalization channels. The speed of entry of new banks after a collapse has a stabilizing effect.

Series:

Working Paper No. 2021/102

Frequency:

regular

English

Publication Date:

April 23, 2021

ISBN/ISSN:

9781513582313/1018-5941

Stock No:

WPIEA2021102

Pages:

74

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