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 increases

the efficiency of investment. A simple credit market model is developed to show that such

efficiency improvements may be disturbed by competition-induced incentives for banks to

accept higher default rates, which result in instability of the financial system. Thereby we

offer a complementary explanation to the relationship between competition and stability in

financial markets. Consequently we argue that government intervention, in the form of

intelligent regulation, is necessary to ensure the development of sustainable financial

markets.