with Dean Corbae and Kuan Liu
Last Version: July 2025 [download pdf] [slides]
Abstract: What is the role of rising nonbank concentration for financial stability? Using a dynamic structural model of bank and nonbank competition, we conduct experiments to measure bank losses during periods of stress. In our model, nonbanks’ are financed by bank credit lines. Nonbanks may choose to default on their credit lines and spill over losses on banks. We find that rising nonbank concentration mitigates financial instability, at the expense of more costly loans for borrowers. Thus we contribute to the competition-stability debate.