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

June 1, 1998

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Tito Cordella, and Eduardo Levy Yeyati. Financial Opening, Deposit Insurance, and Risk in a Model of Banking Competition, (USA: International Monetary Fund, 1998) accessed December 22, 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

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.

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

Keywords: Asset quality, Bank Competition, Bank deposits, Bank margin, Banks, Competition, Deposit Insurance, Deposit rate, Deposit rates, Financial Opening, Information Disclosure, Insurance, Insurance agency, Monopolistic Competition, Risk, Risk position, Southeast Asia, WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1998/097
Stock No:

WPIEA0971998
ISBN:

9781451851991
ISSN:

1018-5941

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