Deposit Competition and Financial Fragility: Evidence from the US Banking Sector

Gregor Matvos, Ali Hortacsu and Mark Egan
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Gregor Matvos: University of Chicago Booth School of Bu
Mark Egan: University of Chicago

No 1363, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: We develop and estimate an empirical model of the U.S. banking sector using data covering the largest U.S. banks over the period 2002-2013. Our model incorporates insured depositors and run-prone uninsured depositors who choose between differentiated banks. Banks compete for deposits and can endogenously default. We estimate demand for uninsured deposits and find that it declines with banks' financial distress, which is not the case for insured deposits demand. We calibrate the supply side of the model and find that the deposit elasticity to bank default is large enough to introduce the possibility of multiple equilibria, suggesting that banks can be very fragile. Last, we use our model to analyze the proposed bank regulatory changes. For example, our results suggest that the capital requirement below 17% can lead to significant instability in the banking system, and that a requirement of 31% maximizes the welfare of the worst equilibrium.

Date: 2015
New Economics Papers: this item is included in nep-ban and nep-com
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Journal Article: Deposit Competition and Financial Fragility: Evidence from the US Banking Sector (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:1363

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