The paper investigates, from the welfare and growth point of view, the determination of the optimal capacity of the banking system. For that purpose, we consider an overlapping generation model with endogenous growth. There is horizontal differentiation and imperfect competition in the banking sector. Macroeconomic shocks affect the return on capital and, together with the expectations of depositors, condition the stability of the banking sector. We specify to what extent deposit insurance may reduce instability and increase the number of deposits, welfare and growth. We also characterize the conditions under which excess banking capacities may appear and how their reduction may improve welfare.
Bruno Amable, Jean-Bernard Chatelain, and Olivier De Bandt
Classification JEL : 016, G21
Keywords : Deposit insurance, imperfect competition, growth, banking
Updated on: 06/12/2018 11:09