Bank Market Structure, Systemic Risk, and Interbank Market Breakdowns
AbstractThis paper explores theoretically the implications of bank market structure and banking system risks concentration for the functioning of interbank markets. It employs a simple model where banks are exposed to both credit and liquidity risk, there is no asymmetric information, no market power, no friction in secondary markets and deposit contracts are fully contingent. We show that (a) the concentration of risks induced by changes in bank market structure makes interbank market breakdowns more likely; (b) welfare monotonically decreases in risk concentration; and (c) risk concentration and a high probability of interbank market breakdowns can be driven by risk control diseconomies of scale and scope and increases in financial firms’ size. As banking systems become more concentrated, improvement of risk control technologies in financial institutions and in regulatory bodies appear as important as other policies considered in the literature to minimize the probability of interbank market breakdowns.
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Bibliographic InfoPaper provided by European University Institute in its series RSCAS Working Papers with number 2010/76.
Date of creation: 01 Oct 2010
Date of revision:
bank market structure; systemic risk; interbank markets;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-23 (All new papers)
- NEP-BAN-2011-01-23 (Banking)
- NEP-BEC-2011-01-23 (Business Economics)
- NEP-COM-2011-01-23 (Industrial Competition)
- NEP-FMK-2011-01-23 (Financial Markets)
- NEP-RMG-2011-01-23 (Risk Management)
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