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Welfare and bank risk-taking

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  • Marcella Lucchetta

    (University of Venice Ca’ Foscari)

Abstract

Our study investigates a model of general equilibrium banking that incorporates moral hazard and incentive mechanisms for bank risk-taking, with a particular focus on deposit market competition. Our findings reveal that when banks compete perfectly in the deposit market, it leads to maximal welfare and an optimal level of bank failure risk. This outcome remains valid even if the risk of failure for competitive banks is higher than that of banks with monopoly rents, and it is not affected by social costs associated with bank failures. Our model suggests that there is no trade-off between bank competition and financial stability. Our results support the empirical findings of Carlson, Correia, and Luck (J Polit Econ 130(2): 462–520, 2022).

Suggested Citation

  • Marcella Lucchetta, 2024. "Welfare and bank risk-taking," Annals of Finance, Springer, vol. 20(2), pages 239-258, June.
    • Handle: RePEc:kap:annfin:v:20:y:2024:i:2:d:10.1007_s10436-024-00440-x
    DOI: 10.1007/s10436-024-00440-x
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    General equilibrium; Bank competition; Financial stability;
    All these keywords.

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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