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

Author/Editor:

Tito Cordella ; Eduardo Levy Yeyati

Publication Date:

June 1, 1998

Electronic Access:

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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:

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

Series:

Working Paper No. 1998/097

Subject:

Bank deposits Banking Competition Deposit insurance Deposit rates Financial crises Financial institutions Financial markets Financial services Insurance

English

Publication Date:

June 1, 1998

ISBN/ISSN:

9781451851991/1018-5941

Stock No:

WPIEA0971998

Pages:

45

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