{
  "title": "Financial Intermediation, Competition, and Risk: A General Equilibrium Exposition",
  "publication": "IMF Working Papers, May 1, 2009",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/financial-intermediation-competition-and-risk-a-general-equilibrium-exposition-22931",
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  "summary": "We study a simple general equilibrium model in which investment in a risky technology is subject to moral hazard and banks can extract market power rents.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Study of a simple general equilibrium model in which investment in a risky technology is subject to moral hazard and banks can extract market power rents.\n- Key result statements from the paper:\n  - More bank competition results in lower economy-wide risk, lower bank capital ratios, more efficient production plans and Pareto-ranked real allocations.\n  - Perfect competition supports a second best allocation and optimal levels of bank risk and capitalization.\n  - These results are at variance with those obtained by a large literature that has studied a similar environment in partial equilibrium.\n  - The results are empirically relevant and demonstrate the need of general equilibrium modeling to design financial policies aimed at attaining socially optimal levels of systemic risk in the economy."
    },
    {
      "heading": "Model and scope",
      "content": "- Framework: simple general equilibrium model with:\n  - Risky technology investment subject to moral hazard.\n  - Banks able to extract market power rents.\n- Comparison: contrasts general equilibrium outcomes with those from a large partial equilibrium literature that studied similar environments."
    },
    {
      "heading": "Major findings (enumerated)",
      "content": "- Competition and risk:\n  - More bank competition → lower economy-wide risk.\n  - More bank competition → lower bank capital ratios.\n  - More bank competition → more efficient production plans.\n  - More bank competition → Pareto-ranked real allocations.\n- Market structure benchmark:\n  - Perfect competition supports a second best allocation.\n  - Perfect competition supports optimal levels of bank risk and capitalization.\n- Literature contrast:\n  - Results differ from many partial equilibrium studies of similar settings.\n- Empirical relevance:\n  - Findings are described as empirically relevant and indicate policy design implications."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Need for general equilibrium modeling:\n  - Design financial policies using general equilibrium frameworks to attain socially optimal levels of systemic risk in the economy.\n- Regulatory focus:\n  - Consideration of how bank competition affects system-wide risk, capital ratios, and allocation efficiency when setting prudential and competition policies."
    },
    {
      "heading": "Keywords and subject classification",
      "content": "- Subject: Banking, Competition, General equilibrium models, Moral hazard, Self-employment\n- Keywords: bank, market power rent, WP\n\nFinancial Intermediation, Competition, and Risk: A General Equilibrium Exposition — IMF Working Paper No. 2009/105\n\n---\n\n Content in this bundle\n\n- wp09105\n  - wp09105 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp09105 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/financial-intermediation-competition-and-risk-a-general-equilibrium-exposition-22931"
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    "Authors: Gianni De Nicolo, Marcella Lucchetta",
    "Published: May 1, 2009",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451872521.001",
    "Study of a simple general equilibrium model in which investment in a risky technology is subject to moral hazard and banks can extract market power rents.",
    "Key result statements from the paper:",
    "Framework: simple general equilibrium model with:",
    "Comparison: contrasts general equilibrium outcomes with those from a large partial equilibrium literature that studied similar environments.",
    "Competition and risk:",
    "Market structure benchmark:",
    "Literature contrast:",
    "Empirical relevance:",
    "Need for general equilibrium modeling:",
    "Regulatory focus:",
    "Subject: Banking, Competition, General equilibrium models, Moral hazard, Self-employment",
    "Keywords: bank, market power rent, WP",
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