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Competition among Financial Intermediaries and the Risk of Contagious Failures

Author

Listed:
  • De Bandt. O.

Abstract

The paper presents a model where financial intermediaries invest in a safe and a risky, two-period asset -with aggregate and idiosyncratic shocks on tire risky asset. The realization of returns is privately observed by banks, which offer deposit contracts, with a promised return at t = 1, the level of which depends on the degree of competition in the banking industry. Banks are sensitive .to the propagation of other banks' failures: depositors try to infer the state of the economy.and revise their beliefs after observing too many failures, hence they may watt to rut even on relatively healthy banks.

Suggested Citation

  • De Bandt. O., 1994. "Competition among Financial Intermediaries and the Risk of Contagious Failures," Working papers 30, Banque de France.
  • Handle: RePEc:bfr:banfra:30
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    File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_30_1994.pdf
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