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A Quantitative Model of Banking Industry Dynamics

Author

Listed:
  • 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, 2026. "A Quantitative Model of Banking Industry Dynamics," Working Papers 26-45, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:103867
    DOI: 10.21799/frbp.wp.2026.45
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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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