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Bank competition and stability: friends or foes?

Published on November 30, 2015   20 min
0:00
Hello, I am Thorsten Beck. I'm a professor of Banking and Finance at Cass Business School at City University, London, and I've worked in the area of financial development and financial stability over the past 15 years or so. And the topic I'm going to talk about today is 'Bank Competition and Stability: Friends or Foes?'
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Stability concerns half being at the center of banking sector policies for the last couple of decades, and for good reason. Throughout the world, in both developing and developed countries, there have been a lot of banking crises, there have been a lot of bank failures, and a lot of systemic banking crises where whole banking systems got into trouble. So the issue of how competition affects stability is per se an interesting question, not just for academics but very important for policy makers, for practitioners. In general, economists like competition. That's what we teach everybody in the very first quarters. In the financial sector, especially in the banking system on the other hand, the role of competition is quite controversial. On the one hand, having less competition might actually give incentives for banks to engage in long-term relationships with firms, with borrowers. On the other hand, not having enough competition might hamper innovation, might hamper contestability, might reduce the benefits for customers of financial services. Now, similarly, on the stability side, restrictions on competition have been often justified with the risk of bank failure, with the risk of banks' stability. Over the past couple of decades what we have been observing across the world is a trend towards consolidation, meaning more concentrated banking systems and larger banks. So again, this makes the question of the relationship between bank competition, bank market structure, and bank stability a very relevant one.
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Bank competition and stability: friends or foes?

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