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Universal vs separated banking with deposit insurance in a macro model

Author

Listed:
  • Tatiana Damjanovic

    (Department of Economics, University of Exeter)

  • Vladislav Damjanovic

    (Department of Economics, University of Exeter)

  • Charles Nolan

    (University of Glasgow)

Abstract

A macroeconomic model is developed to analyse integration of retail and investment banks with and without deposit insurance. Benefits flow from elimination of double marginalization and insurance premia which retail banks otherwise charge investment banks. Deposit insurance increases average output, whether banks are universal or separated, and can be welfare improving as it counters monopoly distortion. However, when unfavourable shocks hit the economy, the size of government bailout is larger with integrated than with separated banks. The welfare assessment of the structure of banks depends on the kinds of shock hitting the economy, the degree of competitiveness of the banking sectors as well as on the efficiency of government intervention (the excess burden of deposit insurance). Scenarios are sketched in which different banking structures are desirable.

Suggested Citation

  • Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2013. "Universal vs separated banking with deposit insurance in a macro model," Discussion Papers 1308, University of Exeter, Department of Economics.
    • Handle: RePEc:exe:wpaper:1308
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    File URL: https://exetereconomics.github.io/RePEc/dpapers/DP1308.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-1891, September.
    2. Stelios Arvanitis & Alexandros Louka, 2015. "Martingale Transforms with Mixed Stable Limits and the QMLE for Conditionally Heteroskedastic Models," Working Papers 201508, Athens University Of Economics and Business, Department of Economics.
    3. Charles Nolan & Plutarchos Sakellaris & John D. Tsoukalas, 2016. "Optimal Bailout of Systemic Banks," Working Papers 201607, Athens University Of Economics and Business, Department of Economics.
    4. Alfred Duncan & Charles Nolan, 2020. "Reform of the UK Financial Policy Committee," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(1), pages 1-30, February.
    5. repec:aeb:wpaper:201607:i:7:y:2016 is not listed on IDEAS
    6. Alfred Duncan & Charles Nolan, 2015. "Objectives and Challenges of Macroprudential Policy," Working Papers 2015_22, Business School - Economics, University of Glasgow.

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    More about this item

    Keywords

    Financial intermediation in DSGE models; separating commercial and investment banking; competition and risks; systematic and idiosyncratic risks; bailouts; deposit insurance and economic wedges.;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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