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Financial Opening, Deposit Insurance, and Risk in a Model of Banking Competition

Author

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  • Mr. Tito Cordella
  • Mr. Eduardo Levy Yeyati

Abstract

This paper studies the impact of competition on the determination of interest rates and banks’ risk-taking behavior under different assumptions about deposit insurance and the dissemination of financial information. It finds that lower entry costs foster competition in deposit rate sand reduce banks’ incentives to limit risk exposure. Although higher insurance coverage amplifies this effect, two alternative arrangements (risk-based contributions to the insurance fund and public disclosure of financial information) help to reduce it. Moreover, uninsured but fully informed depositors and risk-based full deposit insurance yield the same equilibrium risk level, which is independent of entry costs. The welfare implications of the different arrangements are also explored.

Suggested Citation

  • Mr. Tito Cordella & Mr. Eduardo Levy Yeyati, 1998. "Financial Opening, Deposit Insurance, and Risk in a Model of Banking Competition," IMF Working Papers 1998/097, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1998/097
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    References listed on IDEAS

    as
    1. Tito Cordella & Eduardo Levy Yeyati, 1998. "Public Disclosure and Bank Failures," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 110-131, March.
    2. Marie-Odile Yanelle, 1997. "Banking Competition and Market Efficiency," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 215-239.
    3. Economides, Nicholas & Hubbard, R Glenn & Palia, Darius, 1996. "The Political Economy of Branching Restrictions and Deposit Insurance: A Model of Monopolistic Competition among Small and Large Banks," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 667-704, October.
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    6. Chiappori, Pierre-Andre & Perez-Castrillo, David & Verdier, Thierry, 1995. "Spatial competition in the banking system: Localization, cross subsidies and the regulation of deposit rates," European Economic Review, Elsevier, vol. 39(5), pages 889-918, May.
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    More about this item

    Keywords

    WP; Banks; Bank Competition; Deposit Insurance; Financial Opening; Information Disclosure; Monopolistic Competition; Risk; deposit rate; insurance agency; risk position; bank margin; asset quality; Deposit rates; Competition; Insurance; Bank deposits; Southeast Asia;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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

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