59 Pages Posted: 21 Apr 2017 Last revised: 4 Jun 2017
Date Written: June 3, 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 separate 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 (June 3, 2017). Available at SSRN: https://ssrn.com/abstract=2926385