Competition vs. Stability: Oligopolistic Banking System with Run Risk
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Summary:
This paper develops a model where large financial intermediaries subject to systemic runs internalize the effect of their leverage on aggregate risk, returns and asset prices. Near the steady-state, they restrict leverage to avoid the risk of a run which gives rise to an accelerator effect. For large adverse shocks, the system enters a zone with high leverage and possibly runs. The length of time the system remains in this zone depends on the degree of concentration through a franchise value, price-drop and recapitalization channels. The speed of entry of new banks after a collapse has a stabilizing effect.
Series:
Working Paper No. 2021/102
Subject:
Asset prices Bank deposits Competition Financial markets Financial services Investment banking Prices Shadow banking
Frequency:
regular
English
Publication Date:
April 23, 2021
ISBN/ISSN:
9781513582313/1018-5941
Stock No:
WPIEA2021102
Pages:
74
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