Working Paper Series no. 30: Competition among financial intermediaries and the risk of contagious failures

Abstract

The paper presents a model where financial intermediaries invest in a safe and a risky, two-period asset-with aggregate and idiosyncratic shocks on tire risky asset. The realization of returns is privately observed by banks, which offer deposit contracts, with a promised return at t = 1, the level of which depends on the degree of competition in the banking industry. Banks are sensitive .to the propagation of other banks' failures: depositors try to infer the state of the economy and revise their beliefs after observing too many failures, hence they may watt to rut even on relatively healthy banks (the paper includes a short and a long abstract in French).

Olivier De Bandt
September 1994

Classification JEL : D81, D82, G21

Keywords : Monetary policy, Fiscal regimes, International cooperation, Credibility, Time-inconsistency