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Banks, Markets, and Efficiency

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Author Info

  • Falko Fecht

    (Deutsche Bundesbank)

  • Antoine Martin

    (Federal Reserve Bank of New York)

Abstract

Following Diamond (1997) and Fecht (2004) we use a model in which financial market access of households restrains the efficiency of the liquidity insurance that banks' deposit contracts provide to households that are subject to idiosyncratic liquidity shocks. But in contrast to these approaches we assume spacial monopolistic competition among banks. Since monopoly rents are assumed to bring about inefficiencies, improved financial market access that limits monopoly rents also entails a positive effect. But this beneficial effect is only relevant if competition among banks does not sufficiently restrain monopoly rents already. Thus our results suggest that in the bank-dominated financial system of Germany, in which banks intensely compete for households' deposits, improved financial market access might reduce welfare because it only reduces risk sharing. In contrast, in the banking system of the U.S., with less competition for households' deposits, a high level of households' financial market participation might be beneficial.

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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0507017.

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Length: 35 pages
Date of creation: 19 Jul 2005
Date of revision:
Handle: RePEc:wpa:wuwpfi:0507017

Note: Type of Document - pdf; pages: 35
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Web page: http://128.118.178.162

Related research

Keywords: Financial Intermediaries; Risk Sharing; Banking Competition; Comparing Financial Systems;

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References

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  1. Antoine Martin, 2001. "Liquidity provision vs. deposit insurance : preventing bank panics without moral hazard?," Research Working Paper RWP 01-05, Federal Reserve Bank of Kansas City.
  2. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 473-94, July.
  3. Ernst-Ludwig VON THADDEN, 1996. "Optimal Liquidity Provision and Dynamic Incentive Compatibility," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9604, Université de Lausanne, Faculté des HEC, DEEP.
  4. Elizabeth Kiser, 2002. "Predicting Household Switching Behavior and Switching Costs at Depository Institutions," Review of Industrial Organization, Springer, vol. 20(4), pages 349-365, June.
  5. Carletti, Elena & Hartmann, Philipp & Spagnolo, Giancarlo, 2005. "Bank Mergers, Competition and Liquidity," Working Paper Series 182, Sveriges Riksbank (Central Bank of Sweden).
  6. Douglas W. Diamond, . "Liquidity, Banks and Markets," CRSP working papers 326, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  7. Fecht, Falko & Huang, Kevin & Martin, Antoine, 2005. "Financial intermediaries, markets and growth," Discussion Paper Series 1: Economic Studies 2005,03, Deutsche Bundesbank, Research Centre.
  8. Ernst-Ludwig VON THADDEN, 1998. "Liquidity Creation through Banks and Markets : Multiple Insurance and Limited Market Access," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9820, Université de Lausanne, Faculté des HEC, DEEP.
  9. von Thadden, Ernst-Ludwig, 1997. "The term-structure of investment and the banks' insurance function," European Economic Review, Elsevier, vol. 41(7), pages 1355-1374, July.
  10. David R. Skeie, 2008. "Banking with nominal deposits and inside money," Staff Reports 242, Federal Reserve Bank of New York.
  11. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  12. Falko Fecht, 2003. "On the Stability of Different Financial Systems," Finance 0305008, EconWPA.
  13. Douglas W. Diamond & Raghuram G. Rajan, 1998. "Liquidity risk, liquidity creation and financial fragility: a theory of banking," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  14. Harris, Milton & Raviv, Artur, 1990. " Capital Structure and the Informational Role of Debt," Journal of Finance, American Finance Association, vol. 45(2), pages 321-49, June.
  15. Erland Nier & Celine Gondat-Larralde, 2004. "The Microeconomics Of Retail Banking - An Empirical Analysis Of The UK Market For Personal Current Accounts," Royal Economic Society Annual Conference 2004 110, Royal Economic Society.
  16. Hamerle, Alfred & Liebig, Thilo & Scheule, Harald, 2004. "Forecasting Credit Portfolio Risk," Discussion Paper Series 2: Banking and Financial Studies 2004,01, Deutsche Bundesbank, Research Centre.
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Cited by:
  1. Matias Fontenla, 2007. "Liquidity Provision and Banking Crises with Heterogeneous Agents," 2007 Meeting Papers 976, Society for Economic Dynamics.

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