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Universal vs separated banking with deposit insurance in a macro model

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  • Tatiana Damjanovic

    (Department of Economics, University of Exeter)

  • Vladislav Damjanovic

    (Department of Economics, University of Exeter)

  • Charles Nolan

    (University of Glasgow)

Abstract

A macroeconomic model is developed to analyse integration of retail and investment banks with and without deposit insurance. Benefits flow from elimination of double marginalization and insurance premia which retail banks otherwise charge investment banks. Deposit insurance increases average output, whether banks are universal or separated, and can be welfare improving as it counters monopoly distortion. However, when unfavourable shocks hit the economy, the size of government bailout is larger with integrated than with separated banks. The welfare assessment of the structure of banks depends on the kinds of shock hitting the economy, the degree of competitiveness of the banking sectors as well as on the efficiency of government intervention (the excess burden of deposit insurance). Scenarios are sketched in which different banking structures are desirable.

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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 1308.

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Date of creation: 2013
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Handle: RePEc:exe:wpaper:1308

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Keywords: Financial intermediation in DSGE models; separating commercial and investment banking; competition and risks; systematic and idiosyncratic risks; bailouts; deposit insurance and economic wedges.;

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