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Bank competition, securitization and risky investment

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  • Li, Zhe
  • Sun, Jianfei

Abstract

We build a general equilibrium model of bank competition in which securitization is the banks�optimal choice. A symmetric capacity-constrained Bertrand competition equilibrium exists as in the directed search literature, e.g., Burdett, Shi and Wright (2001). A key feature of the model is that banks face heterogeneous projects and they can use their lending rate as a tool to compete for good projects. The competition of banks lowers the lending rate, which in turn results in a low deposit rate. Consequently, a low level of credit supply coexists with some uninvested high-return projects. The shortage of credit supply resulting from bank competition naturally motivates banks to sell their assets through securities in order to raise more funds to invest in the projects being rationed.

Suggested Citation

  • Li, Zhe & Sun, Jianfei, 2011. "Bank competition, securitization and risky investment," MPRA Paper 34173, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:34173
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    References listed on IDEAS

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    More about this item

    Keywords

    bank competition; directed search; capital requirement; securitization; risky investment;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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