## Competition vs. Stability: Oligopolistic Banking System with Run Risk

_IMF Working Papers, April 23, 2021_

## Source details

**Canonical URL:** [Competition vs. Stability: Oligopolistic Banking System with Run Risk](https://www.imf.org/en/publications/wp/issues/2021/04/23/competition-vs-50277)

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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

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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, 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**
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_Source: https://www.imf.org/en/publications/wp/issues/2021/04/23/competition-vs-50277_