Competition and the risk of bank failure: Breaking with the representative borrower assumption

We examine the relation between intensity of competition in loan market and risk bank failure, a model with adverse selection. As well established, presence two opposite margin risk-shifting effects creates conditions for nonmonotonicity: conventional competition-fragility view may be challenged at high interest rates. These rates however too to compatible oligopolistic equilibrium conditions. The challenging competition-stability has been argued terms representative borrower managing profitability-safeness trade-off under moral hazard. However, assumption is not innocuous, playing down by construction effect. paper considers selection situation where that managed banks facing heterogeneous borrowers, shows analytically, case trapezoidal distribution idiosyncratic systemic factors, always valid.