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A Quantitative Model of Banking Industry Dynamics

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  • Dean Corbae
  • Pablo D’Erasmo

Abstract

We develop a simple model of banking industry dynamics to study the relation between market structure and financial stability. Motivated by data, we analyze an environment where a small number of dominant (nonatomistic) banks strategically interact with a large number of small (atomistic) banks. A nontrivial endogenous bank size distribution arises out of entry and exit in response to aggregate and regional shocks to borrowers’ production technologies and banks’ idiosyncratic deposit inflows. Since the model has nonatomistic banks that generate granular spillovers from idiosyncratic shocks and pose systemic risk, we use the model to study the implications of too-big-to-fail policies.

Suggested Citation

  • Dean Corbae & Pablo D’Erasmo, 2025. "A Quantitative Model of Banking Industry Dynamics," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 3(4), pages 621-673.
    • Handle: RePEc:ucp:jpemac:doi:10.1086/738381
    DOI: 10.1086/738381
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    1. is not listed on IDEAS
    2. Priyo, Asad Karim Khan, 2023. "Investigating Excess Reserve Accumulation and Credit Crunch in U.S. Commercial Banks Focusing on the Financial Crisis," MPRA Paper 117851, University Library of Munich, Germany.
    3. Alexandru GRIBINCEA & Georgeta GHERGHINA, 2013. "Necessity To Diminish The Giant Banks," ECONOMY AND SOCIOLOGY: Theoretical and Scientifical Journal, Socionet;Complexul Editorial "INCE", issue 3, pages 71-75.
    4. Eduardo Dávila & Ansgar Walther, 2021. "Corrective Regulation with Imperfect Instruments," NBER Working Papers 29160, National Bureau of Economic Research, Inc.
    5. Niepmann, Friederike, 2023. "Banking across borders with heterogeneous banks," Journal of International Economics, Elsevier, vol. 142(C).
    6. Roger Aliaga‐Díaz & María Pía Olivero, 2011. "The Cyclicality Of Price‐Cost Margins In Banking: An Empirical Analysis Of Its Determinants," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 26-46, January.
    7. Cornelia Kerl & Friederike Niepmann, 2014. "What determines the composition of international bank flows?," Staff Reports 681, Federal Reserve Bank of New York.
    8. Dávila, Eduardo & Walther, Ansgar, 2020. "Does size matter? Bailouts with large and small banks," Journal of Financial Economics, Elsevier, vol. 136(1), pages 1-22.

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