Banks, Markets, and Efficiency

35 Pages Posted: 25 Jan 2005

See all articles by Falko Fecht

Falko Fecht

Deutsche Bundesbank; Frankfurt School of Finance & Management

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: January 19, 2005

Abstract

Following Diamond (1997) 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 spatial 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.

Keywords: Banking competition, deposit contracts, efficiency, risk sharing

JEL Classification: G21, D61, D82

Suggested Citation

Fecht, Falko and Martin, Antoine, Banks, Markets, and Efficiency (January 19, 2005). Available at SSRN: https://ssrn.com/abstract=653584 or http://dx.doi.org/10.2139/ssrn.653584

Falko Fecht (Contact Author)

Deutsche Bundesbank ( email )

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

Frankfurt School of Finance & Management ( email )

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Antoine Martin

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

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United States
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