Desirable banking competition and stability

Jonathan Benchimol and Caroline Bozou

Journal of Financial Stability, 2024, vol. 73, issue C

Abstract: Every financial crisis raises questions about how the banking market structure affects the real economy. Although low bank concentration may reduce markups and foster riskier behavior, concentrated banking systems appear more resilient to financial shocks. We use a nonlinear dynamic stochastic general equilibrium model with financial frictions to compare the transmissions of shocks under different competition and concentration configurations. The results reveal that oligopolistic competition amplifies the effects of the shocks relative to monopolistic competition. The transmission mechanism works through the markups, which are amplified when banking concentration is increased. The desirable banking market structure is determined according to financial stability and social welfare objectives. Moreover, we find that depending on policymakers’ preferences, a banking concentration of five to eight banks balances social welfare and bank stability objectives in the United States.

Keywords: Banking concentration; Imperfect competition; Financial stability; Welfare analysis; DSGE model (search for similar items in EconPapers)
JEL-codes: D43 E43 E51 G21 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Desirable banking competition and stability (2024)
Working Paper: Desirable banking competition and stability (2024)
Working Paper: Desirable Banking Competition and Stability (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:73:y:2024:i:c:s1572308924000512

DOI: 10.1016/j.jfs.2024.101266

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