We provide a tractable dynamic model of the banking industry where (1) an intensification of competition increases market measures of efficiency and fragility of
banks but not necessarily social measures of efficiency; (2) economies can avoid the
fragility costs of competition by enhancing bank governance and tightening leverage
requirements; and (3) bank competition materially shapes risk taking and the monetary transmission mechanism. Using detailed data on U.S. banks, we find statistical
evidence supportive of the model predictions.