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State ownership, credit risk and bank competition: a mixed oligopoly approach

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  • Bibhas Saha
  • Rudra Sensarma

Abstract

The recent financial crisis led many governments to buy equity in banks leading to situations of mixed oligopoly in banking markets. We model such a case where a partially state-owned bank competes with a private bank in collecting deposits. The government is purely a welfare maximizer while the private bank maximizes profits. Both banks face risks in the loan market. We show that if credit risk is sufficiently high and there is limited liability, the state-owned bank mitigates depositors' losses by mobilizing less deposits leading to contraction of aggregate deposits. This contradicts the standard mixed oligopoly results in the literature.

Suggested Citation

  • Bibhas Saha & Rudra Sensarma, 2013. "State ownership, credit risk and bank competition: a mixed oligopoly approach," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 6(1), pages 1-13, March.
    • Handle: RePEc:taf:macfem:v:6:y:2013:i:1:p:1-13
    DOI: 10.1080/17520843.2011.641719
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    References listed on IDEAS

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    1. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
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    3. Kumar, Ashutosh & Saha, Bibhas, 2008. "Spatial competition in a mixed duopoly with one partially nationalized firm," Journal of Comparative Economics, Elsevier, vol. 36(2), pages 326-341, June.
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    7. Milne, Alistair, 2006. "Optimal regulation of deposit taking financial intermediaries: A correction," European Economic Review, Elsevier, vol. 50(2), pages 509-516, February.
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    9. Khaled Sherif & Michael Borish & Alexandra Gross, 2003. "State-owned Banks in the Transition : Origins, Evolution, and Policy Responses," World Bank Publications - Books, The World Bank Group, number 14851.
    10. repec:bla:econom:v:57:y:1990:i:227:p:319-28 is not listed on IDEAS
    11. Bibhas Saha & Rudra Sensarma, 2004. "Divestment and Bank Competition," Journal of Economics, Springer, vol. 81(3), pages 223-247, March.
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    Cited by:

    1. Ping-Lun Tseng & Wen-Chung Guo, 2022. "Fintech, Credit Market Competition, and Bank Asset Quality," Journal of Financial Services Research, Springer;Western Finance Association, vol. 61(3), pages 285-318, June.
    2. Dalla, Eleni, 2023. "Asymmetries in banking conduct: A Cournot - Bertrand model," Economics Letters, Elsevier, vol. 233(C).
    3. Ping‐Lun Tseng & Wen‐Chung Guo, 2022. "Bank risk‐taking in a mixed duopoly: The role of the state‐owned bank," International Review of Finance, International Review of Finance Ltd., vol. 22(4), pages 688-724, December.
    4. Sanjukta Sarkar & Rudra Sensarma, 2016. "The relationship between competition and risk-taking behaviour of Indian banks," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 8(1), pages 95-119, April.
    5. Arup Bose & Debashis Pal & David E. M. Sappington, 2014. "The impact of public ownership in the lending sector," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 47(4), pages 1282-1311, November.

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