Banking, Markets, and Efficiency

34 Pages Posted: 8 Jun 2005

See all articles by Antoine Martin

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

Falko Fecht

Deutsche Bundesbank; Frankfurt School of Finance & Management

Date Written: June 2005

Abstract

In this paper, we address the question whether increasing households' financial market access improves welfare in a financial system in which there is intense competition among banks for private households' funds. Following earlier work by Diamond and by Fecht, we use a model in which the degree of liquidity insurance offered to households through banks' deposit contracts is restrained by households' financial market access. However, we also assume spatial monopolistic competition among banks. Because monopoly rents are assumed to bring about inefficiencies, improved financial market access that limits monopoly rents also entails a positive effect; however, this beneficial effect is only relevant if competition among banks does not sufficiently restrain monopoly rents already.

Thus, our results suggest that in Germany's bank-dominated financial system, which is characterized by intense competition for households' deposits, improved financial market access might reduce welfare because it only reduces risk sharing. In contrast, in the U.S. banking system, where there is less competition for households' deposits, a high level of household financial market participation might be beneficial.

Keywords: financial intermediaries, risk sharing, banking competition

JEL Classification: E44, G10, G21

Suggested Citation

Martin, Antoine and Fecht, Falko, Banking, Markets, and Efficiency (June 2005). Available at SSRN: https://ssrn.com/abstract=739145 or http://dx.doi.org/10.2139/ssrn.739145

Antoine Martin (Contact Author)

Federal Reserve Bank of New York - Research and Statistics ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6943 (Phone)

Falko Fecht

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
+4969956632312 (Phone)

HOME PAGE: http://https://www.bundesbank.de/en/falko-fecht

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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