Financial Opening, Deposit Insurance, and Risk in a Model of Banking Competition

Download or read book Financial Opening, Deposit Insurance, and Risk in a Model of Banking Competition written by Mr.Tito Cordella and published by International Monetary Fund. This book was released on 1998-06-01 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the impact of competition on the determination of interest rates and banks’ risk-taking behavior under different assumptions about deposit insurance and the dissemination of financial information. It finds that lower entry costs foster competition in deposit rate sand reduce banks’ incentives to limit risk exposure. Although higher insurance coverage amplifies this effect, two alternative arrangements (risk-based contributions to the insurance fund and public disclosure of financial information) help to reduce it. Moreover, uninsured but fully informed depositors and risk-based full deposit insurance yield the same equilibrium risk level, which is independent of entry costs. The welfare implications of the different arrangements are also explored.