Abstract: Chapters 5 and 6 identified a number of features common to most periods of financial instability in recent decades; these observations were felt to validate to some extent the various theories of financial crisis that have been proposed in the literature. On the other hand, not one theory was able to explain financial instability; features of several had to be jointly present in order for a situation of financial instability to arise. This chapter explores the hypothesis that many of the factors underlying heightened systemic risk can be adequately subsumed in an industrial organization framework, with particular reference to the role of an intensification of competition among financial intermediaries following market developments that reduce entry barriers. The approach seeks both to encompass the mechanisms highlighted by existing theories of financial crisis, particularly those relating to uncertainty and imperfect information, and also to extend them by focusing on certain structural aspects that have hitherto been generally neglected by theorists, and which can be discerned in many, if not all, cases of financial instability. (In other words, it seeks to complement and not substitute for the analysis of Chs. 5 and 6.). It is suggested that the hypothesis could provide additional policy recommendations and also useful leading indicators of financial instability as well as fragility, both for regulators and for market participants themselves.

Keywords: competition, entry barriers, financial crisis, financial instability, financial intermediaries, imperfect information, industrial organization, leading indicators, systemic risk, uncertainty,