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Crises in competitive versus monopolistic banking systems

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We study a monetary, general equilibrium economy in which banks exist because they provide inter-temporal insurance to risk-averse depositors. A \\"banking crisis\\" is defined as a case in which banks exhaust their reserve assets. This may (but need not) be associated with liquidation of a storage asset. When such liquidation does occur, the result is a real resource loss to the economy and we label this a \\"costly banking crisis.\\" There is a monetary authority whose only policy choice is the long-run, constant rate of growth of the money supply, and thus the rate of inflation. Under different model specifications, the banking industry is either a monopoly bank or a competitive banking industry. It is shown that the probability of a banking crisis may be higher either under competition or under monopoly. This is shown to depend on the rate of inflation.

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  • John H. Boyd & Gianni De Nicolo & Bruce D. Smith, 2004. "Crises in competitive versus monopolistic banking systems," Proceedings, Federal Reserve Bank of Cleveland, pages 487-509.
  • Handle: RePEc:fip:fedcpr:y:2004:p:487-509
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    1. Boyd, John H. & Chang, Chun & Smith, Bruce D., 2002. "Deposit insurance: a reconsideration," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1235-1260, September.
    2. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-864, November.
    3. Mr. Gianni De Nicolo & Philip F. Bartholomew & Ms. Jahanara Zaman & Ms. Mary G Zephirin, 2003. "Bank Consolidation, Internationalization, and Conglomeration: Trends and Implications for Financial Risk," IMF Working Papers 2003/158, International Monetary Fund.
    4. John H. Boyd & Pedro Gomis-Porqueras & Sungkyu Kwak & Bruce David Smith, 2014. "A User's Guide to Banking Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 800-892, November.
    5. Bruce D. Smith, 2002. "Monetary Policy, Banking Crises, and the Friedman Rule," American Economic Review, American Economic Association, vol. 92(2), pages 128-134, May.
    6. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
    7. Franklin Allen & Douglas Gale, 2001. "Comparing Financial Systems," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262511258, December.
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    Keywords

    Bank competition; Financial crises;

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