Crisis in Competitive Versus Monopolistic Banking Systems

By Bruce D. Smith, Gianni De Nicolo, John H. Boyd

September 1, 2003

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Bruce D. Smith, Gianni De Nicolo, and John H. Boyd Crisis in Competitive Versus Monopolistic Banking Systems, (USA: International Monetary Fund, 2003) accessed November 9, 2024

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.

Subject: Banking, Banking crises, Commercial banks, Competition, Currencies, Financial crises, Financial institutions, Financial markets, Monetary policy, Money, Reserve requirements

Keywords: Banking crises, Banking Crisis (Panic), Banking system, Cash reserves, Commercial banks, Competition, Currencies, Equilibrium choice, Investment liquidation, Maximization problem, Monetary General Equilibrium, Monopolistic banking system, Monopoly bank, Nominal rate, Reserve deposit, Reserve requirements, Reserve-deposit ratio, Storage investment, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/188
Stock No:

WPIEA1882003
ISBN:

9781451859584
ISSN:

1018-5941

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