Last bank standing: What do I gain if you fail?
AbstractBanks are highly leveraged institutions, potentially attracted to speculative lending even without deposit insurance. A counterbalancing incentive to lend prudently is the risk of loss of charter value, which depends on future rents. We show in a dynamic model that current concentration does not reduce speculative lending, and may in fact increase it. In contrast, a policy of temporary increases in market concentration after a bank failure, by promoting a takeover of failed banks by a solvent institution, is very effective. By making speculative lending decisions strategic substitutes, it grants bankers an incentive to remain solvent. Subsequent entry policy fine-tunes the trade-off between the social costs of reduced competition and the gain in stability.
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Bibliographic InfoArticle provided by Elsevier in its journal European Economic Review.
Volume (Year): 46 (2002)
Issue (Month): 9 (October)
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Web page: http://www.elsevier.com/locate/eer
Other versions of this item:
- 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
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
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