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Crisis in Competitive versus Monopolistic Banking Systems

Author/Editor: Boyd, John H. | De Nicoló, Gianni | Smith, Bruce D.
Authorized for Distribution: September 1, 2003
Electronic Access: Free Full Text (PDF file size is 924KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: We study a monetary, general equilibrium economy in which banks exist because they provide intertemporal insurance to risk-averse depositors. A "banking crisis" is defined as a case in which banks exhaust their reserve assets. Under different model specifications, the banking industry is either a monopoly bank or a competitive banking industry. If the nominal rate of interest (rate of inflation) is below (above) some threshold, a monopolistic banking system will always result in a higher (lower) crisis probability. Thus, the relative crisis probabilities under the two banking systems cannot be determined independently of the conduct of monetary policy. We further show that the probability of a "costly banking crisis" is always higher under competition than under monopoly. However, this apparent advantage of the monopoly bank is due strictly to the fact that it provides relatively less valuable intertemporal insurance. These theoretical results suggest that banking system structure may matter for financial stability.
 
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Series: Working Paper No. 03/188
Subject(s): Banking systems | Financial crisis | Economic models
Author's keyword(s): Banking Crisis (Panic); Monetary General Equilibrium
 
English  
    Published:   September 1, 2003        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA1882003   Pages:   38
    Price:   US$15.00 (Academic Rate: US$15.00 )
       
     
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