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Bank competition, fire-sales and financial stability

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  • Ka Kei Chan
  • Alistair Milne

Abstract

This paper applies a simple liquidity modelling framework and shows that forced asset sales ('fire-sale') provide an alternative theoretical support to the traditional view that bank competition can lead to financial instability. This arises from the fact that in a multi-bank economy, a bank can take advantage of other banks in fire-sale by choosing a riskier funding structure, and the incentive to do so increases as the number of banks in the economy increases. We also discuss the effectiveness of some possible policies to restrain the incentives for excessive risk-taking.

Suggested Citation

  • Ka Kei Chan & Alistair Milne, 2014. "Bank competition, fire-sales and financial stability," The European Journal of Finance, Taylor & Francis Journals, vol. 20(10), pages 874-891, October.
    • Handle: RePEc:taf:eurjfi:v:20:y:2014:i:10:p:874-891
    DOI: 10.1080/1351847X.2013.836552
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    Cited by:

    1. Phan, Hien Thu & Anwar, Sajid & Alexander, W. Robert J. & Phan, Hanh Thi My, 2019. "Competition, efficiency and stability: An empirical study of East Asian commercial banks," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    2. Xuanling MA & Meng JI, 2023. "Analysis on Liquidity Risk Management of Monetary and Financial Services based on the Goal of Financial Stability," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 72-91, June.
    3. Abdelsalam, Omneya & Elnahass, Marwa & Batten, Jonathan A. & Mollah, Sabur, 2021. "New insights into bank asset securitization: The impact of religiosity," Journal of Financial Stability, Elsevier, vol. 54(C).

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