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Desirable Banking Competition and Stability

Jonathan Benchimol and Caroline Bozou
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Caroline Bozou: Centre d'Économie de la Sorbonne

No 2022.18, Bank of Israel Working Papers from Bank of Israel

Abstract: Every financial crisis raises questions about how the banking market structure affects the real economy. Although low bank concentration may lower markups and foster bank risk-taking, controlled banking concentration systems appear more resilient to financial shocks. We use a nonlinear dynamic stochastic general equilibrium model with financial frictions to compare the transmissions of shocks under different competition and concentration configurations. Oligopolistic competition and concentration amplify the effects of the shocks relative to monopolistic competition. The transmission mechanism works through the markups, which are amplified when banking concentration is increased. According to financial stability and social welfare objectives, the desirable banking market structure is determined. Depending on policymakers' preferences, the banking concentration of five to seven banks balances social welfare and bank stability objectives.

Keywords: Banking Concentration; Imperfect Competition; Financial Stability; Welfare Analysis; DSGE Model (search for similar items in EconPapers)
JEL-codes: D43 E43 E51 G21 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2022-10
New Economics Papers: this item is included in nep-ban, nep-com, nep-dge and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2022.18.pdf First Version, 2022 (application/pdf)

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Journal Article: Desirable banking competition and stability (2024) Downloads
Working Paper: Desirable banking competition and stability (2024)
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