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Crisis in Competitive Versus Monopolistic Banking Systems

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Author Info

  • Bruce D. Smith
  • Gianni De Nicoló
  • John H. Boyd

Abstract

We study a monetary, general equilibrium economy in which banks exist because they provide intertemporal insurance to risk-averse depositors. A "banking crisis" is defined as a case in which banks exhaust their reserve assets. Under different model specifications, the banking industry is either a monopoly bank or a competitive banking industry. If the nominal rate of interest (rate of inflation) is below (above) some threshold, a monopolistic banking system will always result in a higher (lower) crisis probability. Thus, the relative crisis probabilities under the two banking systems cannot be determined independently of the conduct of monetary policy. We further show that the probability of a "costly banking crisis" is always higher under competition than under monopoly. However, this apparent advantage of the monopoly bank is due strictly to the fact that it provides relatively less valuable intertemporal insurance. These theoretical results suggest that banking system structure may matter for financial stability.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/188.

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Length: 38
Date of creation: 01 Sep 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/188

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Related research

Keywords: Banking systems; Economic models; banking; banking crisis; banking crises; banking system; deposit insurance; bankers; banking panics; bank problem; crisis probability; discounted present value; banking industry; present value; banking panic; bank runs; bank insolvency; bank regulation; prudential regulation; crisis probabilities; bank risk; bank depositors; financial crisis; bank risk-taking; recessions; bank consolidation; financial risk; bank competition; banking system ? safety nets;

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References

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  1. Champ, B. & Smith, B.D., 1991. "Currency Elasticity and Banking Panics: theory and Evidence," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers, University of Western Ontario, The Centre for the Study of International Economic Relations 9109, University of Western Ontario, The Centre for the Study of International Economic Relations.
  2. Boyd, John H. & Chang, Chun & Smith, Bruce D., 2002. "Deposit insurance: a reconsideration," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(6), pages 1235-1260, September.
  3. Bruce D. Smith, 2002. "Monetary Policy, Banking Crises, and the Friedman Rule," American Economic Review, American Economic Association, American Economic Association, vol. 92(2), pages 128-134, May.
  4. John H. Boyd & Pedro Gomis & Sungkyu Kwak & Bruce D. Smith, 2000. "A User's Guide to Banking Crises," Development Research Unit Working Paper Series, Monash University, Department of Economics archive-36, Monash University, Department of Economics.
  5. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, American Economic Association, vol. 90(1), pages 147-165, March.
  6. Gianni De Nicoló & M. G. Zephirin & Philip F. Bartholomew & Jahanara Zaman, 2003. "Bank Consolidation, Internationalization and Conglomeration," IMF Working Papers 03/158, International Monetary Fund.
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Citations

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Cited by:
  1. Elena Carletti & Agnese Leonello, 2014. "Credit Market Competition and Liquidity Crises," CESifo Working Paper Series 4647, CESifo Group Munich.
  2. Benjamin Miranda Tabak & Guilherme Maia Rodrigues Gomes & Maurício da Silva Medeiros Júnior, 2012. "The Impact of Market Power at Bank Level in Risk-taking: the Brazilian case," Working Papers Series, Central Bank of Brazil, Research Department 283, Central Bank of Brazil, Research Department.
  3. CARLETTI, Elena & LEONELLO, Agnese, 2012. "Credit Market Competition and Liquidity Crises," Economics Working Papers, European University Institute ECO2012/14, European University Institute.
  4. Martin Cihák & Simon Wolfe & Klaus Schaeck, 2006. "Are More Competitive Banking Systems More Stable?," IMF Working Papers 06/143, International Monetary Fund.
  5. Cetorelli, Nicola & Peretto, Pietro F., 2012. "Credit quantity and credit quality: Bank competition and capital accumulation," Journal of Economic Theory, Elsevier, Elsevier, vol. 147(3), pages 967-998.
  6. Samantas, Ioannis, 2013. "Bank competition and financial (in)stability in Europe: A sensitivity analysis," MPRA Paper 51621, University Library of Munich, Germany.
  7. Weiß, Gregor N.F. & Bostandzic, Denefa & Neumann, Sascha, 2014. "What factors drive systemic risk during international financial crises?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 41(C), pages 78-96.
  8. Fu, Xiaoqing (Maggie) & Lin, Yongjia (Rebecca) & Molyneux, Philip, 2014. "Bank competition and financial stability in Asia Pacific," Journal of Banking & Finance, Elsevier, Elsevier, vol. 38(C), pages 64-77.
  9. Hasan, Iftekhar & Marinc , Matej, 2013. "Should competition policy in banking be amended during crises? Lessons from the EU," Research Discussion Papers, Bank of Finland 7/2013, Bank of Finland.
  10. Sophocles N. Brissimis & Manthos D. Delis, 2009. "Bank-Level Estimates of Market Power," Working Papers, Bank of Greece 93, Bank of Greece.
  11. Uhde, André & Heimeshoff, Ulrich, 2009. "Consolidation in banking and financial stability in Europe: Empirical evidence," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(7), pages 1299-1311, July.
  12. Müller, Oliver & Uhde, André, 2013. "Cross-border bank lending: Empirical evidence on new determinants from OECD banking markets," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 23(C), pages 136-162.
  13. Ghossoub, Edgar A., 2012. "Liquidity risk and financial competition: Implications for asset prices and monetary policy," European Economic Review, Elsevier, Elsevier, vol. 56(2), pages 155-173.
  14. Matsuoka, Tarishi, 2013. "Sunspot bank runs in competitive versus monopolistic banking systems," Economics Letters, Elsevier, Elsevier, vol. 118(2), pages 247-249.
  15. Skeie, David R., 2008. "Banking with nominal deposits and inside money," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 17(4), pages 562-584, October.
  16. Sergio SANFILIPPO AZOFRA & Maria CANTERO SAIZ & Begona TORRE OLMO & Carlos LOPEZ GUTIERREZ, 2013. "Financial Crises, Concentration and Efficiency: Effects on Performance and Risk of Banks," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 63(6), pages 537-558, December.
  17. Gianni De Nicolò & Marcella Lucchetta, 2013. "Bank Competition and Financial Stability: A General Equilibrium Exposition," CESifo Working Paper Series 4123, CESifo Group Munich.

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