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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Vives, X (2010), Policy Insight 50: Competition and stability in banking, CEPR Policy Insight No 50, CEPR Press, Paris & London. https://cepr.org/publications/policy-insight-50-competition-and-stability-banking