Financial Competition and the Management of Banking Risks

The paper analyzes the effects of financial competition on the management of banking risks when monopolistically competitive intermediaries exist in the deposit market. Banking decisions refer to deposits and reserves. These decisions are constrained by liquidity and solvency risks. These risks occur because loans may not be repaid, and unexpected deposit withdrawals may occur. The results suggest that a rise in the number of banks increases the liquidity ratios (reserves/deposits) and reduces bank's expected profitability. The results also show that increases in deposit-supply elasticity have the opposite effects. Thus, the model suggests that the effects of competition are neither univocal nor straightforward