|
|
|
| Banking Competition and Risk: the Impact of Competition Policy on Financial Stability |
| XU Lu, YE Guangliang
|
PBC School of Finance,Tsinghua University;
HanQing Advanced Institute of Economics and Finance, Renmin University of China |
|
|
|
|
Abstract This paper explores the relationship between banking competition and financial stability. Based on a Spatial Competition Model, we investigate entrepreneurs' risk-taking behaviors in a game with banking competition. It shows that banking competition decreases the equilibrium loan interest rate, reduces entrepreneurs' risk-taking choices, and thus enhances financial stability. From the perspective of social welfare, banking competition may hurt banks' profitability, but it significantly increases depositors' and entrepreneurs' expected payoffs, and thus enhances social welfare. In consequence, an effective competition policy discourages the risk-taking behaviors of banks, and thus increases financial stability as well as market efficiency, resulting in a higher social welfare. The case with cost asymmetry is also addressed.
|
|
Received: 12 September 2017
Published: 29 October 2018
|
|
|
|
|
|
|
|
