Financial Liberalization, Credit Market Imperfections and Financial System Stability

Master's Thesis from the year 2013 in the subject Business economics - Investment and Finance, grade: 1,5, Utrecht University (Utrecht School of Economics), language: English, abstract: Financial liberalization stimulates competition and thereby supposedly increasesthe efficiency of investment. A simple credit market model is developed to show that suchefficiency improvements may be disturbed by competition-induced incentives for banks toaccept higher default rates, which result in instability of the financial system. Thereby weoffer a complementary explanation to the relationship between competition and stability infinancial markets. Consequently we argue that government intervention, in the form ofintelligent regulation, is necessary to ensure the development of sustainable financialmarkets.