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FINANSMARK-Finansmarkedet

Competition and stability in the banking industry

Awarded: NOK 1.8 mill.

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The goal of this project is to investigate in detail the relationship between competition and financial stability. First, the theoretical studies will be done to better understand some of the mechanisms at play concerning competition and stability, and a dd to the knowledge of the existing theoretical literature. We build on the rich literature from Industrial Organization on how to model competition, in order to get a better modeling approach of the strategic interaction between banks. In particular, we are especially concerned with how banks compete along more than one dimension. For example, they compete on prices by setting interest rates to borrowers (and on deposits), but at the same time they compete for consumers by advertising, having sales perso nnel and other sales activities. Second, in the empirical part of the project we will study the banking industry in Norway. The goal is to estimate how competition affects various factors that may lead to more financial instability. One question is how t he price of funds itself affects the riskiness of funded projects. Another question is how bank margins in the deposit market affect risk taking in the market for loans.

Funding scheme:

FINANSMARK-Finansmarkedet