Deposit Competition and Financial Fragility: Evidence from the US Banking Sector

Citation data:

American Economic Review, ISSN: 0002-8282, Vol: 107, Issue: 1, Page: 169-216

Publication Year:
2017
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DOI:
10.1257/aer.20150342
Author(s):
Mark Egan, Ali Hortaçsu, Gregor Matvos
Publisher(s):
American Economic Association
Tags:
Economics, Econometrics and Finance
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article description
We develop a structural empirical model of the US banking sector. Insured depositors and run-prone uninsured depositors choose between differentiated banks. Banks compete for deposits and endogenously default. The estimated demand for uninsured deposits declines with banks' financial distress, which is not the case for insured deposits. We calibrate the supply side of the model. The calibrated model possesses multiple equilibria with bank-run features, suggesting that banks can be very fragile. We use our model to analyze proposed bank regulations. For example, our results suggest that a capital requirement below 18 percent can lead to significant instability in the banking system.

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