Competition for Deposits, Fragility, and Insurance

On the relationship between market power and bank risk taking

“…The negative association between market power and bank risk taking has been established, among many others, by Matutes and Vives (1996) and Repullo (2004). Our work is similar to that of Repullo who considers a dynamic model of banking based on spatial competition à la Salop (1979) with insured depositors to show that for very low level of market power, low intermediation margins reduce banks' franchise value and induce banks invest only in the gambling asset.…”

“…Repullo (2004) shows that a risk-based capital requirement can undermine banks' incentive for risk taking and promote safety. Our model also retains similarity with the work of Matutes and Vives (1996), which considers a model of bank competition where depositors have beliefs about the probability of failure of the banks, and banks can choose to invest in different assets with different degrees of riskiness that depends on the market share of each bank. It is the presence of depositors' beliefs what generates consistency requirements that should be fulfilled in any equilibrium.…”

Bank Competition and Financial (In)Stability in Europe: A Sensitivity Analysis

“…On the top of that, Matutes and Vives (1996) consider the self-fulfilling expectations of depositors to endogenously affect the quality -or the failure probability -of a bank. In other words, the bank withhigh depositors' trust will enjoy higher margins and greater market share as perceived to be diversified and hence safer in their eyes.…”

Bank Competition and Financial Stability: A General Equilibrium Exposition

“…Under limited liability, unobservable risk choices, risk-insensitive deposit demand, and constant return to scale in screening and monitoring, an increase in deposit market competition raises the deposit rate, reduces banks' expected profits and prompts banks to take on more risk. This implication has been illustrated by Allen and Gale (2000) in both static and simple dynamic settings, and it is the key thrust of work by Keeley (1990), Matutes and Vives (1996), Hellmann, Murdock and Stiglitz (2000), Cordella and Levi-Yeyati (2002), Repullo (2004), among many others.…”