Does Market Concentration Preclude Risk Taking in Banking?
AbstractWe analyse risk-taking behaviour of banks in the context of a model based on spatial competition. Banks mobilise deposits by offering deposit rates. We show that when the market concentration is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market concentration, all banks choose the prudent asset to invest in, and some depositors may even be left out of the market. Our results suggest a discontinuous relation between market concentration and social welfare. We also show that, in a regime of high deposit insurance, banks are more likely to gamble.
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Bibliographic InfoPaper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 120.
Date of creation: Jun 2004
Date of revision:
Financial intermediation; Risk-taking; Market concentration.;
Other versions of this item:
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-06-02 (All new papers)
- NEP-COM-2004-06-02 (Industrial Competition)
- NEP-REG-2004-06-02 (Regulation)
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Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
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