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Bank Market Structure, Systemic Risk, and Interbank Market Breakdowns

Marcella Lucchetta ()

No 2010/76, RSCAS Working Papers from European University Institute

Abstract: This paper explores theoretically the implications of bank market structure and banking system risks concentration for the functioning of interbank markets. It employs a simple model where banks are exposed to both credit and liquidity risk, there is no asymmetric information, no market power, no friction in secondary markets and deposit contracts are fully contingent. We show that (a) the concentration of risks induced by changes in bank market structure makes interbank market breakdowns more likely; (b) welfare monotonically decreases in risk concentration; and (c) risk concentration and a high probability of interbank market breakdowns can be driven by risk control diseconomies of scale and scope and increases in financial firms’ size. As banking systems become more concentrated, improvement of risk control technologies in financial institutions and in regulatory bodies appear as important as other policies considered in the literature to minimize the probability of interbank market breakdowns.

Keywords: bank market structure; systemic risk; interbank markets (search for similar items in EconPapers)
Date: 2010-10-01
New Economics Papers: this item is included in nep-ban, nep-bec, nep-com, nep-fmk and nep-rmg
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