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Financial Opening, Deposit Insurance and Risk in a Model of Banking Competition

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  • Cordella, Tito
  • Levy Yeyati, Eduardo

Abstract

This paper studies the impact of competition on the determination of interest rates, and on banks’ risk taking behaviour, under different assumptions about deposit insurance and the dissemination of financial information. We find that lower entry costs foster competition in deposit rates and reduce banks’ incentives to limit risk exposure. While higher insurance coverage amplifies this effect, two alternative arrangements (risk based contributions to the deposit insurance fund, and public disclosure of financial information) contribute to reduce it. Moreover, uninsured but fully informed depositors and risk based full deposit insurance yield the same, entry cost independent, equilibrium risk level. The welfare implications of the different arrangements are also explored.

Suggested Citation

  • Cordella, Tito & Levy Yeyati, Eduardo, 1998. "Financial Opening, Deposit Insurance and Risk in a Model of Banking Competition," CEPR Discussion Papers 1939, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1939
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    References listed on IDEAS

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    1. Tito Cordella & Eduardo Levy Yeyati, 1998. "Public Disclosure and Bank Failures," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 110-131, March.
    2. Marie-Odile Yanelle, 1997. "Banking Competition and Market Efficiency," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 215-239.
    3. Economides, Nicholas & Hubbard, R Glenn & Palia, Darius, 1996. "The Political Economy of Branching Restrictions and Deposit Insurance: A Model of Monopolistic Competition among Small and Large Banks," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 667-704, October.
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    More about this item

    Keywords

    Bank Competition; Banks; Deposit Insurance; Financial Opening; information disclosure; Monopolistic Competition; Risk;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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