Competition vs. Stability: Oligopolistic Banking System with Run Risk
IMF Working Papers, April 23, 2021
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- Competition vs. Stability: Oligopolistic Banking System with Run Risk
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Bibliographic details
- Authors: Damien Capelle
- Published: April 23, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513582313.001
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, large intermediaries 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.
Key findings and mechanisms
- Large financial intermediaries internalize how their leverage affects:
- aggregate risk,
- returns,
- asset prices.
- Near steady-state behavior:
- restriction of leverage to avoid run risk,
- emergence of an accelerator effect due to leverage control.
- Adverse-shock dynamics:
- a distinct zone characterized by high leverage and potential systemic runs.
- Determinants of persistence in the high-leverage/run zone:
- degree of concentration via a franchise value channel,
- price-drop channel,
- recapitalization channel.
- Recovery dynamics:
- faster entry of new banks post-collapse stabilizes the system.
Policy implications and stabilizing channels
- Franchise value channel: concentration affects incentives and the duration of instability.
- Price-drop channel: asset price declines amplify leverage-related run risk.
- Recapitalization channel: recapitalization dynamics influence time spent in crisis zone.
- Market entry: policies or conditions that speed the entry of new banks after a collapse have a stabilizing effect.
Subject and keywords
- Subject: Asset prices, Bank deposits, Competition, Financial markets, Financial services, Investment banking, Prices, Shadow banking
- Keywords: Asset prices, Bank deposits, Competition, franchise value, Global, Investment banking, net worth, price-drop channel, real asset, recapitalization channel, Shadow banking
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- Working Paper