59 Pages Posted: 21 Apr 2017
Date Written: April 2, 2017
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: Suggested Citation
Kalyaeva, Daria, Competition and the Interbank Market (April 2, 2017). Available at SSRN: https://ssrn.com/abstract=2926385