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Bank Market Structure, Systemic Risk, and Interbank Market Breakdowns
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1028-3625
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EUI RSCAS; 2010/76
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LUCCHETTA, Marcella, Bank Market Structure, Systemic Risk, and Interbank Market Breakdowns, EUI RSCAS, 2010/76 - https://hdl.handle.net/1814/14633
Abstract
This paper explores theoretically the implications of bank market structure and banking system risks
concentration for the functioning of interbank markets. It employs a simple model where banks are
exposed to both credit and liquidity risk, there is no asymmetric information, no market power, no
friction in secondary markets and deposit contracts are fully contingent. We show that (a) the
concentration of risks induced by changes in bank market structure makes interbank market
breakdowns more likely; (b) welfare monotonically decreases in risk concentration; and (c) risk
concentration and a high probability of interbank market breakdowns can be driven by risk control
diseconomies of scale and scope and increases in financial firms’ size. As banking systems become
more concentrated, improvement of risk control technologies in financial institutions and in regulatory
bodies appear as important as other policies considered in the literature to minimize the probability of
interbank market breakdowns.