Competition and the Interbank Market

59 Pages Posted: 21 Apr 2017  

Daria Kalyaeva

Swiss Finance Institute; University of Lausanne

Date Written: April 2, 2017

Abstract

I focus on the interaction between banks’ investment strategies and their interbank lending activities. Accounting for these interactions produces results that differ sharply from those in standard models. I set up a model where profit-maximizing banks jointly determine their optimal investment in the asset market and in the interbank market. I show that the classical negative correlation between competition levels and prices or quantities can break down in the interbank market. Competition in sep- arate markets can decrease as the total number of banks in the economy increases. The nature of competition in the interbank market can switch between Cournot and Bertrand competition. I show that an expansionary monetary policy or a competition policy aimed at lowering barriers to entry in the asset investment market can result in a lower total investment in the asset, which is exactly the opposite of the goals of such policies.

Keywords: Banking, competition, interbank market, investment decisions

JEL Classification: G10, G11, G21

Suggested Citation

Kalyaeva, Daria, Competition and the Interbank Market (April 2, 2017). Available at SSRN: https://ssrn.com/abstract=2926385

Daria Kalyaeva (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Lausanne ( email )

Lausanne, Vaud CH-1015
Switzerland

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