Policy insights

Policy Insights

Policy Insight 50: Competition and stability in banking

This Policy insight models the trade-off between competition and stability in the banking sector. Competition might increase instability through two channels: by exacerbating the coordination problem of depositors/investors on the liability side and fostering panics; and by increasing incentives to take risk, and thus the raising probability of failure. Regulation can alleviate this competition-stability trade-off, but the design of optimal regulation has to take into account the intensity of competition.

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