Bank Competition and Financial Stability : Friends or Foes?
Theory makes ambiguous predictions about the relationship between market structure and competitiveness of the banking system and banking sector stability. Empirical studies focusing on individual countries provide similarly ambiguous results, whil...
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| Format: | Policy Research Working Paper |
| Language: | English |
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World Bank, Washington, DC
2012
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| Online Access: | http://documents.worldbank.org/curated/en/2008/06/9605096/bank-competition-financial-stability-friends-or-foes http://hdl.handle.net/10986/6863 |
| Summary: | Theory makes ambiguous predictions about
the relationship between market structure and
competitiveness of the banking system and banking sector
stability. Empirical studies focusing on individual
countries provide similarly ambiguous results, while
cross-country studies point mostly to a positive
relationship between competition and stability in the
banking system. Where liberalization and unfettered
competition have resulted in fragility, this has been mostly
the consequence of regulatory and supervisory failures. The
advantages of competition for an efficient and inclusive
financial system are strong, and regulatory and supervisory
policies should focus on an incentive-compatible environment
for banking rather than try to fine-tune market structure or
the degree of competition. |
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