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

Enrico Perotti and Javier Suarez

Working Papers from CEMFI

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.

Date: 2001
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Citations: View citations in EconPapers (3)

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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)
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Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2001_0109

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