Deposit Insurance, Bank Competition and Risk Taking

Kaniska Dam () and Santiago Sánchez Pagés
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Kaniska Dam: Division of Economics, CIDE
Authors registered in the RePEc Author Service: Santiago Sánchez-Pagés

No DTE 385, Working Papers from CIDE, División de Economía

Abstract: We analyse risk-taking behaviour of banks in the context of a model based on spatial competition. Banks mobilise deposits by offering deposit rates. We show that when the market concentration is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market concentration, all banks choose the prudent asset to invest in, and some depositors may even be left out of the market. Our results suggest a discontinuous relation between market concentration and social welfare. We also show that, in a regime of high deposit insurance, banks are more likely to gamble.

Keywords: Deposit Insurance; Bank Competition; Risk Taking (search for similar items in EconPapers)
JEL-codes: D41 D81 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2007-06
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