Last Bank Standing: What Do I Gain if You Fail?

Enrico Perotti and Javier Suarez

No 2933, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Banks are highly leveraged institutions, potentially attracted to speculative lending even without deposit insurance. A counterbalancing incentive to lend prudently is the risk of loss of charter value, which depends on future rents. We show in a dynamic model that current concentration does not reduce speculative lending, and may in fact increase it. In contrast, a policy of temporary increases in market concentration after a bank failure, by promoting a takeover of failed banks by a solvent institution, is very effective. By making speculative lending decisions strategic substitutes, it grants bankers an incentive to remain solvent. Subsequent entry policy fine-tunes the trade-off between the social costs of reduced competition and the gain in stability.

Keywords: Banking crises; Bank mergers; Charter value; Market structure dynamics; Prudential regulation (search for similar items in EconPapers)
JEL-codes: G21 G28 L10 (search for similar items in EconPapers)
Date: 2001-08
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://cepr.org/publications/DP2933 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Last bank standing: What do I gain if you fail? (2002)
Working Paper: Last Bank Standing: What Do I Gain If You Fail? (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:2933

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP2933

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().