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Competition among Financial Intermediaries and the Risk of Contagious Failures

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Author Info

  • De Bandt. O.

Abstract

The paper presents a model where financial intermediaries invest in a safe and a risky, two-period asset -with aggregate and idiosyncratic shocks on tire risky asset. The realization of returns is privately observed by banks, which offer deposit contracts, with a promised return at t = 1, the level of which depends on the degree of competition in the banking industry. Banks are sensitive .to the propagation of other banks' failures: depositors try to infer the state of the economy.and revise their beliefs after observing too many failures, hence they may watt to rut even on relatively healthy banks.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 30.

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Length: 44 pages
Date of creation: 1995
Date of revision:
Handle: RePEc:bfr:banfra:30

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Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/
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Related research

Keywords: Term structure of interest rates ; Expectations hypothesis ; Error-correction model.;

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Cited by:
  1. Hans Degryse & Grégory Nguyen, 2004. "Interbank exposures: an empirical examination of systemic risk in the Belgian banking system," Working Paper Research 43, National Bank of Belgium.

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