TY - JOUR
T1 - Deposit competition and financial fragility
T2 - Evidence from the US banking sector
AU - Egan, Mark
AU - Hortaçsu, Ali
AU - Matvos, Gregor
N1 - Funding Information:
Ali Hortaçsu acknowledges financial support of the NSF (SES 1426823).
PY - 2017/1
Y1 - 2017/1
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=85009164730&partnerID=8YFLogxK
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U2 - 10.1257/aer.20150342
DO - 10.1257/aer.20150342
M3 - Article
AN - SCOPUS:85009164730
SN - 0002-8282
VL - 107
SP - 169
EP - 216
JO - American Economic Review
JF - American Economic Review
IS - 1
ER -
