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Bank Competition and Financial Stability: A General Equilibrium Exposition

Gianni De Nicolò and Marcella Lucchetta ()

No 4123, CESifo Working Paper Series from CESifo Group Munich

Abstract: We study the welfare properties of a general equilibrium banking model with moral hazard that encompasses incentive mechanisms for bank risk-taking studied in a large partial equilibrium literature. We show that competitive equilibriums maximize welfare and yield an optimal level of banks’ risk of failure. This result holds even though the risk of failure of competitive banks is higher than that of banks enjoying monopoly rents, and is robust to the introduction of social costs of bank failures. In this model, there is no trade-off between bank competition and financial stability.

Keywords: general equilibrium; bank competition; financial stability (search for similar items in EconPapers)
JEL-codes: D50 G21 (search for similar items in EconPapers)
Date: 2013
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Working Paper: Bank Competition and Financial Stability; A General Equilibrium Exposition (2011) Downloads
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