publication . Preprint . Article . 2013

Banking Competition and Economic Stability

Ronald D. Fischer; Felipe Ramirez; Nicolas Inostroza;
Open Access
  • Published: 01 Jan 2013
Abstract
We consider a two-period model of a banking system to explore the effects of competition on the stability and efficiency of economic activity. In the model, competing banks lend to entrepreneurs. After entrepreneurs receive the loans for their projects, there is a probability of a shock. The shock implies that a fraction of firms will default and be unable to pay back their loans. This will require banks to use their capital and reserves to pay back depositors, restricting restrict second period lending, thus amplifying the economic effect of the initial shock. There are two possible types of equilibria, a prudent equilibrium in which banks do not collapse after...
Subjects
free text keywords: Microeconomics, restrict, Monetary economics, Economic stability, Attractiveness, Forbearance, Economics
Related Organizations
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publication . Preprint . Article . 2013

Banking Competition and Economic Stability

Ronald D. Fischer; Felipe Ramirez; Nicolas Inostroza;