Fianancial institutions. This risk of contagion is one of the most divtmetive features of the financial sector.

contagion could result from banks dineit linkages,in the interbanking markets or payment systems , or indirectly from the interdependency of their portfolios. Financial innovation has also turned out to be an important source of financial instability .instruments like loan sales or credit default sweps originated as a way to improve risk sharing and risk management.However,more recently they have been associated with greater risk in banking system.Transferring credit risk may induce banks to retain only the most illiguised toxic assets in their portfolios or lower banks incentives to screen and monitor borrowers appropriately.This makes it more difficult for banks to sell assets in their portfolios in case of need , and it worsens the quality of lending standards .moreover,by transferring risk on to other financial institutions,banks are allowed to reduce their capital holdings and increase leverage.This contributes to reduce lending standards and worsen the fragility of the financial sector further. More institutions in the sector definitely increasing the level of competition in the banking and financial sector.but whether this completion is increasing the stability is still a debatable and contravercial topic .Whenever the social cost of a bank failure is larger than its private cost of a,it becomes necessary to offer public supportto individual institutions. However this should not imply a systematic and indiscriminate rescue of all banks. Even when appropriately designed,bailouts and public intervention have some important drawbacks.They generate disparities between small and large banks with negative competitive consequences for the former.they keep inefficient institutions alive.They create the expectations of future support ,thus worsening the excessive risk taking problem.Thus only the banks having the systematic impact should receive public support .these are more likely to be large size banks and banks occupying key positions in the payment system or in the interbanking market.Finally ,we can say ,regulation and supervisory framework plays an important role in the relationship between competition and stability.Thus a properly designed regylation can help intigate the problem of too much