Competition and Financial Stability

Franklin Allen
Douglas Gale
Publication Type: 
Papers
Journal Name: 
Journal of Money, Credit and Banking
Journal Volume: 
36
Pages: 
453-481
Publication Year: 
2004

Competition policy in the banking sector is complicated by the necessity of maintaining financial stability. Greater competition may be good for (static) efficiency, but bad for financial stability. From the point of view of welfare economics, the relevant question is: what are the efficient levels of competition and financial stability? We use a variety of models to address this question and find that different models provide different answers. The relationship between competition and stability is complex: sometimes competition increases stability. In addition, in a second-best world, concentration may be socially preferable to perfect competition and perfect stability may be socially undesirable.

JEL Codes: 
D4, D5, D6, G2
Region: 
Global
Topic: 
General Equilibrium
Topic: 
Financial Institutions
Topic: 
Economic Modeling