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http://hdl.handle.net/10419/19737
  
Title:Banks, markets, and efficiency PDF Logo
Authors:Fecht, Falko
Martin, Antoine
Issue Date:2005
Series/Report no.:Discussion Paper, Series 2: Banking and Financial Supervision 2005,04
Abstract:Following Diamond (1997) and Fecht (2004) we use a model in which financial market access of households restrains the efficiency of the liquidity insurance that banks' deposit contracts provide to households that are subject to idiosyncratic liquidity shocks. But in contrast to these approaches we assume spacial monopolistic competition among banks. Since monopoly rents are assumed to bring about inefficiencies, improved financial market access that limits monopoly rents also entails a positive effect. But this beneficial effect is only relevant if competition among banks does not sufficiently restrain monopoly rents already. Thus our results suggest that in the bank-dominated financial system of Germany, in which banks intensely compete for households' deposits, improved financial market access might reduce welfare because it only reduces risk sharing. In contrast, in the banking system of the U.S., with less competition for households' deposits, a high level of households' financial market participation might be beneficial.
Subjects:Financial Intermediaries
Risk Sharing
Banking Competition
Comparing Financial Systems
JEL:G21
E44
G10
Document Type:Working Paper
Appears in Collections:Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank

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