 Competition, coinsurance and moral hazard in bankingAugusto Hasman and Margarita Samartín Journal of Banking & Finance, 2024, vol. 164, issue C Abstract: This study examines the interaction between bank deposit market competition, incentives to take risks on the asset side, and willingness to participate in the interbank market for liquidity coinsurance. The interbank market in the model has two countervailing effects on risk-taking. First, it allows for more profitable long-term investment, which adds to a bank’s charter value and decreases risk-taking motives. Second, greater investment in the long-term asset also makes risk-taking potentially more profitable, thus eroding charter value. Finally, risk-taking motives also influence banks’ decisions to participate in the interbank market. We demonstrate how a combination of capital requirements and posting a surety bond can restore charter value, promote cooperation and boost economic activity. Additionally, this measure does not limit competition in generating charter value and implies lower costs than capital requirements alone. Keywords: Capital requirements; Charter value; Interbank market; Liquidity coinsurance; Moral hazard (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:164:y:2024:i:c:s0378426624001249 DOI: 10.1016/j.jbankfin.2024.107207 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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