Last Bank Standing: What Do I Gain If You Fail?

Enrico C. Perotti ^[1] ; Javier Suárez ^[2]
1. [1] University of Amsterdam
  
  University of Amsterdam
  
  Países Bajos
2. [2] Centro de Estudios Monetarios y Financieros
  
  Centro de Estudios Monetarios y Financieros
  
  Madrid, España
Localización: Documentos de Trabajo ( CEMFI ), Nº. 9 (Working Paper No. 0109, June 2001), 2001
Idioma: inglés
Enlaces
- Texto completo (pdf)

Resumen
- Banks are highly leveraged institutions, potentially attracted to speculative lending even without deposit insurance. A counterbalancing incentive to lend prudently is the risk of loss of charter value, which depends on future rents. We show in a dynamic model that current concentration does not reduce speculative lending, and may in fact increase it. In contrast, a policy of temporary increases in market concentration after a bank failure, by promoting a takeover of failed banks by a solvent institution, is very effective. By making speculative lending decisions strategic substitutes, it grants bankers an incentive to remain solvent. Subsequent entry policy fine-tunes the trade-off between the social costs of reduced competition and the gain in stability.