Market power and risk taking behavior of banks
We consider a monopolistically competitive banking sector in order to analyze the effects of market concentration on the risk-taking behavior of banks. We show that, under full deposit insurance, a higher level of competition induces banks to invest in a risky asset. When the market concentration is high banks tend to take less risk. We also show that maximum social welfare is achieved either through free entry or through entry restriction.
Volume (Year): 21 (2006)
Issue (Month): 1 ()
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- Matutes, Carmen & Vives, Xavier, 1996. "Competition for Deposits, Fragility, and Insurance," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 184-216, April.
- Perotti, Enrico C. & Suarez, Javier, 2002.
"Last bank standing: What do I gain if you fail?,"
European Economic Review,
Elsevier, vol. 46(9), pages 1599-1622, October.
- Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
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