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Relationship Banking, Deposit Insurance and Bank Portfolio Choice

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  • David Besanko

    (Indiana University)

  • Anjan V. Thakor

    (Washington University in St. Louis)

Abstract

The purpose of this paper is to examine the consequences of interbank competition and bank-capital market competition on the portfolio choices of banks and the welfare of borrowers in a regulatory environment of (de facto) complete deposit insurance. Our focus is on an industry characterized by 'relationship banking', i.e. a setting involving repeated, bilateral credit transactions between banks and borrowers. A key feature of relationship banking is the intertemporal accumulation of proprietary borrower-specific information in the hands of the bank, and the consequent creation of informational rents. To the extent that these rents are shared by the bank and the borrower, both parties see a value in continuing their relationship. The desire to protect such relationships affects the bank's asset portfolio choice.

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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0411046.

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Date of creation: 30 Nov 2004
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Handle: RePEc:wpa:wuwpfi:0411046

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  1. Steven A. Sharpe, 1989. "Asymmetric information, bank lending, and implicit contracts: a stylized model of customer relationships," Finance and Economics Discussion Series 70, Board of Governors of the Federal Reserve System (U.S.).
  2. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  3. Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Is Fairly Priced Deposit Insurance Possible?," Finance 0411018, EconWPA.
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  7. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-27, December.
  8. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  9. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
  10. Carmen Matutes & Xavier Vives, 1992. "Competition for Deposits, Risk of Failure, and Regulation in Banking," CEPR Financial Markets Paper 0018, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
  11. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
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Cited by:
  1. Bharat N. Anand & Alexander Galetovic, 2002. "Investment Banking and Security Market Development: Does Finance Follow Industry?," Documentos de Trabajo 121, Centro de Economía Aplicada, Universidad de Chile.
  2. Mitchell Berlin & Loretta J. Mester, 1997. "Intermediation and vertical integration," Working Papers 97-17, Federal Reserve Bank of Philadelphia.
  3. Gabriel Jiménez & Jose A. Lopez & Jesús Saurina, 2010. "How Does Competition Impact Bank Risk-Taking?," Banco de Espa�a Working Papers 1005, Banco de Espa�a.
  4. J.A. Bikker & A.A.T. Wesseling, 2003. "Intermediation, integration and internationalisation: a survey on banking in Europe," Research Series Supervision (discontinued) 53, Netherlands Central Bank, Directorate Supervision.
  5. Caminal, Ramón & Matutes, Carmen, 1997. "Can Competition in the Credit Market be Excessive?," CEPR Discussion Papers 1725, C.E.P.R. Discussion Papers.

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