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Banks, markets, and efficiency

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  • Falko Fecht
  • Antoine Martin

Abstract

Following Diamond (1997) and Fecht (2004) we use a model in which financial market access of households restrains the efficiency of the liquidity insurance that banks' deposit contracts provide to households that are subject to idiosyncratic liquidity shocks. But in contrast to these approaches we assume spacial monopolistic competition among banks. Since monopoly rents are assumed to bring about inefficiencies, improved financial market access that limits monopoly rents also entails a positive effect. But this beneficial effect is only relevant if competition among banks does not sufficiently restrain monopoly rents already. Thus our results suggest that in the bank-dominated financial system of Germany, in which banks intensely compete for households' deposits, improved financial market access might reduce welfare because it only reduces risk sharing. In contrast, in the banking system of the U.S., with less competition for households' deposits, a high level of households' financial market participation might be beneficial.
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Suggested Citation

  • Falko Fecht & Antoine Martin, 2009. "Banks, markets, and efficiency," Annals of Finance, Springer, vol. 5(2), pages 131-160, March.
    • Handle: RePEc:kap:annfin:v:5:y:2009:i:2:p:131-160
    DOI: 10.1007/s10436-008-0102-x
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    1. Antoine Martin, 2006. "Liquidity provision vs. deposit insurance: preventing bank panics without moral hazard," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(1), pages 197-211, May.
    2. Falko Fecht & Kevin X. D. Huang & Antoine Martin, 2008. "Financial Intermediaries, Markets, and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 701-720, June.
    3. Ernst-Ludwig VON THADDEN, 1996. "Optimal Liquidity Provision and Dynamic Incentive Compatibility," Cahiers de Recherches Economiques du Département d'économie 9604, Université de Lausanne, Faculté des HEC, Département d’économie.
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    8. von Thadden, Ernst-Ludwig, 1999. "Liquidity creation through banks and markets: Multiple insurance and limited market access," European Economic Review, Elsevier, vol. 43(4-6), pages 991-1006, April.
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    13. Britta Hamburg & Mathias Hoffmann & Joachim Keller, 2008. "Consumption, wealth and business cycles in Germany," Empirical Economics, Springer, vol. 34(3), pages 451-476, June.
    14. Falko Fecht, 2004. "On the Stability of Different Financial Systems," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 969-1014, December.
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    Cited by:

    1. Sopp, Heiko, 2018. "Interest rate pass-through to the rates of core deposits: A new perspective," Discussion Papers 25/2018, Deutsche Bundesbank.
    2. Wilko Bolt & Heiko Schmiedel, 2013. "Pricing of payment cards, competition, and efficiency: a possible guide for SEPA," Annals of Finance, Springer, vol. 9(1), pages 5-25, February.

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    More about this item

    Keywords

    Banks; Financial markets; Risk-sharing; Competition; E44; G10; G20;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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