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  3. American Economic Review
  4. January 2017
  5. Deposit Competition and Financial Fragility: Evidence from the US Banking Sector

Deposit Competition and Financial Fragility: Evidence from the US Banking Sector

  • Mark Egan
  • Ali Hortaçsu
  • Gregor Matvos
American Economic Review
vol. 107, no. 1, January 2017
(pp. 169-216)
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Abstract

We develop a structural empirical model of the US banking sector. Insured depositors and run-prone uninsured depositors choose between differentiated banks. Banks compete for deposits and endogenously default. The estimated demand for uninsured deposits declines with banks? financial distress, which is not the case for insured deposits. We calibrate the supply side of the model. The calibrated model possesses multiple equilibria with bank-run features, suggesting that banks can be very fragile. We use our model to analyze proposed bank regulations. For example, our results suggest that a capital requirement below 18 percent can lead to significant instability in the banking system.

Citation

Egan, Mark, Ali Hortaçsu, and Gregor Matvos. 2017. "Deposit Competition and Financial Fragility: Evidence from the US Banking Sector." American Economic Review, 107 (1): 169-216. DOI: 10.1257/aer.20150342

Additional Materials

JEL Classification

  • E44 Financial Markets and the Macroeconomy
  • G01 Financial Crises
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
  • G28 Financial Institutions and Services: Government Policy and Regulation
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill