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Both the country experiences and the academic debate suggest that concentration and competition have ambiguous effects on financial stability and as such, there is no clear conclusion on the validity of either the competition-stability or the competition-fragility hypotheses. However, it would not be entirely correct to either conclude that these two different strands of the literature yield opposing predictions regarding the effects of competition and market power on banking stability. The visible trade-off needs to be addressed by suitable revisit of the binding constraint which in this case could be the regulatory policy in relation to concentration, competition and financial stability. After all,it is not market structure or competition per se, but a regulatory framework sans encouraging-incentives which drives fragility. The views expressed here are the Authors' own and do not reflect the official stance of the Central Bank of Oman or Reserve Bank of India.
About the author
Dr. Deba P. Rath is a Director, Economic Research at Reserve Bank of India (RBI) and is currently on deputation with Financial Stability Department (FSD), Central Bank of Oman (CBO). Dr. Rabi N. Mishra is a Chief General Manager of RBI and is currently on deputation with FSD, CBO as Expert. Dr. Qais Al Yahyaei is the Head of FSD of CBO.
