Banks, markets, and efficiency

Falko Fecht () and Antoine Martin ()

No 2005,04, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank, Research Centre

Abstract: Following Diamond (1997) and Fecht (2004) we use a model in which financial market access of households restrains the efficiency of the liquidity insurance that banks' deposit contracts provide to households that are subject to idiosyncratic liquidity shocks. But in contrast to these approaches we assume spacial monopolistic competition among banks. Since monopoly rents are assumed to bring about inefficiencies, improved financial market access that limits monopoly rents also entails a positive effect. But this beneficial effect is only relevant if competition among banks does not sufficiently restrain monopoly rents already. Thus our results suggest that in the bank-dominated financial system of Germany, in which banks intensely compete for households' deposits, improved financial market access might reduce welfare because it only reduces risk sharing. In contrast, in the banking system of the U.S., with less competition for households' deposits, a high level of households' financial market participation might be beneficial.

Keywords: Financial Intermediaries; Risk Sharing; Banking Competition; Comparing Financial Systems (search for similar items in EconPapers)
JEL-codes: E44 G10 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-com, nep-dge, nep-fin, nep-fmk and nep-mac
Date: Written 2005
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Related works:
Working Paper: Banks, markets, and efficiency (2005)
Working Paper: Banks, Markets, and Efficiency (2005)
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