RWP 20-21, December 2020; updated November 2022
Linkages between bank competition and stability are analyzed in a generalized theoretical framework where market integration is the principal driver of increased competition. Risk implications of across-market competition under banking market integration are significantly different from that of within-market competition. While both modes of analyzing competition increase the number of competitor banks, any relation between competition and risk-taking under within-market competition can be shown to reverse with across-market competition under market integration. Robust to different settings, this result suggests that the lack of consensus in the bank competition-financial stability literature is not an anomaly but an inherent feature of the problem.
JEL Classification: D82, G21, L13
- Dam, Kaniska, and Rajdeep Sengupta. 2020. “Bank Competition and Risk-Taking under Market Integration.” Federal Reserve Bank of Kansas City, Research Working Paper no. 20-21, December. Available at External Linkhttps://doi.org/10.18651/RWP2020-21