Competition and stability in banking

More competition among banks typically enhances the welfare of consumers. However, it may also involve a threat to financial stability, that is of vital importance for the functioning of economies.

This study reveals that many forms of competition do not endanger financial stability, however. For instance, intensified competition among incumbent banks usually has little impact on financial stability. Moreover, in cases where competition does affect financial stability, the latter might best be safeguarded by sound prudential regulation or good corporate governance.