{
  "title": "Competition vs. Stability: Oligopolistic Banking System with Run Risk",
  "publication": "IMF Working Papers, April 23, 2021",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2021/04/23/competition-vs-50277",
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  "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.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- 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.\n- Near the steady-state, large intermediaries restrict leverage to avoid the risk of a run which gives rise to an accelerator effect.\n- For large adverse shocks, the system enters a zone with high leverage and possibly runs.\n- 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.\n- The speed of entry of new banks after a collapse has a stabilizing effect."
    },
    {
      "heading": "Key findings and mechanisms",
      "content": "- Large financial intermediaries internalize how their leverage affects:\n  - aggregate risk,\n  - returns,\n  - asset prices.\n- Near steady-state behavior:\n  - restriction of leverage to avoid run risk,\n  - emergence of an accelerator effect due to leverage control.\n- Adverse-shock dynamics:\n  - a distinct zone characterized by high leverage and potential systemic runs.\n- Determinants of persistence in the high-leverage/run zone:\n  - degree of concentration via a franchise value channel,\n  - price-drop channel,\n  - recapitalization channel.\n- Recovery dynamics:\n  - faster entry of new banks post-collapse stabilizes the system."
    },
    {
      "heading": "Policy implications and stabilizing channels",
      "content": "- Franchise value channel: concentration affects incentives and the duration of instability.\n- Price-drop channel: asset price declines amplify leverage-related run risk.\n- Recapitalization channel: recapitalization dynamics influence time spent in crisis zone.\n- Market entry: policies or conditions that speed the entry of new banks after a collapse have a stabilizing effect."
    },
    {
      "heading": "Subject and keywords",
      "content": "- Subject: Asset prices, Bank deposits, Competition, Financial markets, Financial services, Investment banking, Prices, Shadow banking\n- Keywords: Asset prices, Bank deposits, Competition, franchise value, Global, Investment banking, net worth, price-drop channel, real asset, recapitalization channel, Shadow banking\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2021/04/23/competition-vs-50277"
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    "Authors: Damien Capelle",
    "Published: April 23, 2021",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781513582313.001",
    "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.",
    "Large financial intermediaries internalize how their leverage affects:",
    "Near steady-state behavior:",
    "Adverse-shock dynamics:",
    "Determinants of persistence in the high-leverage/run zone:",
    "Recovery dynamics:",
    "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: 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",
    "**Working Paper**"
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