Bank competition, fire-sales and financial stability

Chan, K. and Milne, A. 2014. Bank competition, fire-sales and financial stability. European Journal of Finance. 20 (10), pp. 874-891. doi:10.1080/1351847X.2013.836552

TitleBank competition, fire-sales and financial stability
AuthorsChan, K. and Milne, A.
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.

JournalEuropean Journal of Finance
Journal citation20 (10), pp. 874-891
ISSN1351-847X
Year2014
PublisherRoutledge
Digital Object Identifier (DOI)doi:10.1080/1351847X.2013.836552
Publication dates
Published12 Sep 2013

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Permalink - https://westminsterresearch.westminster.ac.uk/item/995wq/bank-competition-fire-sales-and-financial-stability


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