Bank Competition and Financial Stability: A General Equilibrium Exposition

Marcella Lucchetta and Gianni De Nicolo

No 2011/295, IMF Working Papers from International Monetary Fund

Abstract: We study versions of a general equilibrium banking model with moral hazard under either constant or increasing returns to scale of the intermediation technology used by banks to screen and/or monitor borrowers. If the intermediation technology exhibits increasing returns to scale, or it is relatively efficient, then perfect competition is optimal and supports the lowest feasible level of bank risk. Conversely, if the intermediation technology exhibits constant returns to scale, or is relatively inefficient, then imperfect competition and intermediate levels of bank risks are optimal. These results are empirically relevant and carry significant implications for financial policy.

Keywords: WP; constant returns to scale; General Equilibrium; Bank Competition; Financial Stability; bank risk; intermediation technology; bank capitalization; bank-risk taking; Competition; Self-employment; Loans; Deposit rates (search for similar items in EconPapers)
Pages: 39
Date: 2011-12-01
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Citations: View citations in EconPapers (5)

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