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Banking Concentration: Implications for Systemic Risk and Safety Net Design

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  • Rodrigo Cifuentes

Abstract

This paper explores the impact of banking concentration on safety net design –in particular, deposit insurance– and on systemic risk. The paper focuses on a system characterized by high concentration and low total number of banks. Each issue is addressed separately. The first section discusses best practices in deposit insurance design and derives conclusions for the case we are interested in. One is that in this context deposit insurance cannot be thought of as a stand-alone instrument, but rather must be understood as an element of the intervention and resolution policy. The second part of the paper studies systemic risk in such a system, using the Eisenberg and Noe (2001) approach to model and study risk in a network of banks. A working metric of the “too big to fail” situation can be derived in the model. More importantly, this section shows how the risk of idiosyncratic shocks spreading through the system are substantially higher in concentrated systems than in decentralized ones. Finally, the paper proposes and evaluates a specific regulatory measure that successfully contains systemic risk.

Suggested Citation

  • Rodrigo Cifuentes, 2003. "Banking Concentration: Implications for Systemic Risk and Safety Net Design," Working Papers Central Bank of Chile 231, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:231
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_231.pdf
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    References listed on IDEAS

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    Cited by:

    1. Smaga, Pawel, 2014. "The concept of systemic risk," LSE Research Online Documents on Economics 61214, London School of Economics and Political Science, LSE Library.
    2. Kox, Henk L.M. & Leeuwen, George van, 2012. "Dynamic market selection in EU business services," MPRA Paper 41016, University Library of Munich, Germany.
    3. Michiel Bijlsma & Wim Suyker, 2008. "The credit crisis and the Dutch economy... in eight frequently asked questions," CPB Memorandum 210.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    4. Michiel Bijlsma & Jeroen Klomp & Sijmen Duineveld, 2010. "Systemic risk in the financial sector; a review and synthesis," CPB Document 210.rdf, CPB Netherlands Bureau for Economic Policy Analysis.

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