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Desirable Banking Competition and Stability

Author

Listed:
  • Jonathan Benchimol

    (Bank of Israel)

  • Caroline Bozou

    (Centre d'Économie de la Sorbonne)

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.

Suggested Citation

  • Jonathan Benchimol & Caroline Bozou, 2022. "Desirable Banking Competition and Stability," Bank of Israel Working Papers 2022.18, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2022.18
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    References listed on IDEAS

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    More about this item

    Keywords

    Banking Concentration; Imperfect Competition; Financial Stability; Welfare Analysis; DSGE Model;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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