Financial opening, deposit insurance, and risk in a model of banking competition
AbstractThis paper studies the impact of competition on the determination of interest rates, and on banksâ risk taking behaviour, under different assumptions about deposit insurance and the dissemination of financial information. We find that lower entry costs foster competition in deposit rates and reduce banksâ incentives to limit risk exposure. While higher insurance coverage amplifies this effect, two alternative arrangements (risk based contributions to the deposit insurance fund, and public disclosure of financial information) contribute to reduce it. Moreover, uninsured but fully informed depositors and risk based full deposit insurance yield the same, entry cost independent, equilibrium risk level. The welfare implications of the different arrangements are also explored.
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Bibliographic InfoArticle provided by Elsevier in its journal European Economic Review.
Volume (Year): 46 (2002)
Issue (Month): 3 (March)
Contact details of provider:
Web page: http://www.elsevier.com/locate/eer
Other versions of this item:
- Tito Cordella & Eduardo Levy Yeyati, 1998. "Financial Opening, Deposit Insurance, and Risk in a Model of Banking Competition," IMF Working Papers 98/97, International Monetary Fund.
- Cordella, Tito & Levy Yeyati, Eduardo, 1998. "Financial Opening, Deposit Insurance and Risk in a Model of Banking Competition," CEPR Discussion Papers 1939, C.E.P.R. Discussion Papers.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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