Crises in Competitive Versus Monopolistic Banking Systems

39 Pages Posted: 3 Feb 2006

See all articles by John H. Boyd

John H. Boyd

University of Minnesota - Twin Cities - Carlson School of Management

Gianni De Nicolo

Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)

Bruce D. Smith

University of Texas at Austin (Deceased)

Date Written: September 2003

Abstract

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.

Keywords: Banking Crisis (Panic), Monetary General Equilibrium

JEL Classification: G21, D50, E40

Suggested Citation

Boyd, John H. and De Nicolo, Gianni and Smith, Bruce D., Crises in Competitive Versus Monopolistic Banking Systems (September 2003). IMF Working Paper No. 03/188. Available at SSRN: https://ssrn.com/abstract=880288

John H. Boyd (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1834 (Phone)

Gianni De Nicolo

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
(410) 234-4507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Bruce D. Smith

University of Texas at Austin (Deceased)

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