Equilibrium and competition in the banking sector Literature review

Equilibrium and competition in the banking sector - Literature review Example Literature speaks of limited equilibrium modelling. General equilibrium, according to researchers depends on various market conditions. Further, level of equilibrium in banking industry depends on competition and financial stability, which depends further on banks’ risk-taking initiatives. Literature review discusses the opinions of various authors on the banking products as trade off between competition and financial stability on different risk choices. Various risk-transferring models are discussed. Role played by bank supervising technologies forms part of various models. New models of bank risk-taking, named partial equilibrium models are analysed. The UK banking sector is statistically reviewed through the Panzar and Rosse model. Literature review attempts various views on banking competition and financial weaknesses through various models to know if any relationship between equilibrium and competition can be established or not. Past Research As stated by Allen and Gale (2004a), the relationship between banking competition and financial health has been majorly discussed in the discourse of limited equilibrium modelling. There are not many general equilibrium models in literature. ... Banking sector can be stated in partial equilibrium if the exchange between competition and financial stability is generally achieved via a standard risk transferring statement practiced on a bank that arranges funds from insured customers and selects the risk of its investment. In such a scenario where market indicates limited liability, sudden risk alternatives, risk-free deposit demand, and stable return to scale in checking, a high in deposit market competition heightens the deposit rate, decreases banks’ anticipated margins and inspires banks to take advances in risk-taking. This conclusion has been derived by Allen and Gale (2000) in both fixed and ordinarily changing scenarios. A number of scholars in literature have supported this predictability in their works, including Keeley (1990), Matutes and Vives (1996), Hellmann, Murdock and Stiglitz (2000), Cordella and Levi-Yeyati (2002), Repullo (2004) among many others. Nevertheless, in the case of competition among banks i n loan and deposit markets, it is loan rate that governs the degree of risk-transfer initiated by companies, as stated by Stiglitz and Weiss (1981). Boyd and De Nicolo (2005) discussed the evaporating trade-off between competition and financial stability when various risk alternatives are analysed by firms. A rise in loan market competition cuts down bank loan rates, strengthening firms’ anticipated profits and prompting them to select secure investments, which gets written into securer bank loan portfolios. Amidst this increasingly conflicted environment, the risk-transferring statement is used on two market units, firms and banks, in stead of a single entity. Latest versions of this kind of model, including bank heterogeneity (De Nicolo and Loukoianova, 2007),