State ownership, credit risk and bank competition: a mixed oligopoly approach

Bibhas Saha and Rudra Sensarma

Macroeconomics and Finance in Emerging Market Economies, 2013, vol. 6, issue 1, 1-13

Abstract: The recent financial crisis led many governments to buy equity in banks leading to situations of mixed oligopoly in banking markets. We model such a case where a partially state-owned bank competes with a private bank in collecting deposits. The government is purely a welfare maximizer while the private bank maximizes profits. Both banks face risks in the loan market. We show that if credit risk is sufficiently high and there is limited liability, the state-owned bank mitigates depositors' losses by mobilizing less deposits leading to contraction of aggregate deposits. This contradicts the standard mixed oligopoly results in the literature.

Date: 2013
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DOI: 10.1080/17520843.2011.641719

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