Financial Opening, Deposit Insurance, and Risk in a Model of Banking Competition

Tito Cordella and Eduardo Levy Yeyati

No 1998/097, IMF Working Papers from International Monetary Fund

Abstract: This paper studies the impact of competition on the determination of interest rates and banks’ risk-taking behavior under different assumptions about deposit insurance and the dissemination of financial information. It finds that lower entry costs foster competition in deposit rate sand reduce banks’ incentives to limit risk exposure. Although higher insurance coverage amplifies this effect, two alternative arrangements (risk-based contributions to the insurance fund and public disclosure of financial information) help to reduce it. Moreover, uninsured but fully informed depositors and risk-based full deposit insurance yield the same equilibrium risk level, which is independent of entry costs. The welfare implications of the different arrangements are also explored.

Keywords: WP; Banks; Bank Competition; Deposit Insurance; Financial Opening; Information Disclosure; Monopolistic Competition; Risk; deposit rate; insurance agency; risk position; bank margin; asset quality; Deposit rates; Competition; Insurance; Bank deposits; Southeast Asia (search for similar items in EconPapers)
Pages: 45
Date: 1998-06-01
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Financial opening, deposit insurance, and risk in a model of banking competition (2002)
Working Paper: Financial Opening, Deposit Insurance and Risk in a Model of Banking Competition (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1998/097

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