American Economic Review Vol. 107 No. 1 2017

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

Mark Egan¹; Ali Hortaçsu²; Gregor Matvos³

¹ Carlson School of Management, University of Minnesota, 321 19th Avenue S., Minneapolis, MN 55455 (e-mail: ) · ² Department of Economics, University of Chicago, 1126 E. 59th Street, Chicago, IL 60637 (e-mail: ) · ³ Booth School of Business, University of Chicago, 5807 S. Woodlawn Avenue, Chicago, IL 60637 (e-mail: )

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.

DOI

10.1257/aer.20150342

Volume

107

Issue

1

Pages

169-216

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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