Competition among Financial Intermediaries and the Risk of Contagious Failures

Olivier de Bandt

Working papers from Banque de France

Abstract: The paper presents a model where financial intermediaries invest in a safe and a risky, two-period asset -with aggregate and idiosyncratic shocks on tire risky asset. The realization of returns is privately observed by banks, which offer deposit contracts, with a promised return at t = 1, the level of which depends on the degree of competition in the banking industry. Banks are sensitive .to the propagation of other banks' failures: depositors try to infer the state of the economy.and revise their beliefs after observing too many failures, hence they may watt to rut even on relatively healthy banks.

Keywords: Term structure of interest rates; Expectations hypothesis; Error-correction model. (search for similar items in EconPapers)
Pages: 44 pages
Date: 1994
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:30

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