Universal vs separated banking with deposit insurance in a macro model

Tatiana Damjanovic (), Vladislav Damjanovic and Charles Nolan

No 1308, Discussion Papers from University of Exeter, Department of Economics

Abstract: A macroeconomic model is developed to analyse integration of retail and investment banks with and without deposit insurance. Benefits flow from elimination of double marginalization and insurance premia which retail banks otherwise charge investment banks. Deposit insurance increases average output, whether banks are universal or separated, and can be welfare improving as it counters monopoly distortion. However, when unfavourable shocks hit the economy, the size of government bailout is larger with integrated than with separated banks. The welfare assessment of the structure of banks depends on the kinds of shock hitting the economy, the degree of competitiveness of the banking sectors as well as on the efficiency of government intervention (the excess burden of deposit insurance). Scenarios are sketched in which different banking structures are desirable.

Keywords: Financial intermediation in DSGE models; separating commercial and investment banking; competition and risks; systematic and idiosyncratic risks; bailouts; deposit insurance and economic wedges. (search for similar items in EconPapers)
JEL-codes: E13 E44 G11 G24 G28 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-dge, nep-ias and nep-mac
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:exe:wpaper:1308

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