The ultimate goal of Dean Corbae's research is to understand why banking market shares vary so much across countries and what the implications of this variance are for bank industry stability and deposit savings rates.
Banking market structure differs considerably across countries. For instance, in 2005 the top three banks in the U.S. and Mexico held nearly 32 percent and 68 percent of the asset market share, respectively. This suggests that less developed financial systems tend to be more concentrated. Another notable difference was in interest rate spreads or the difference between lending and deposit rates. In 2005 the spreads were 4.1 percent and 7.2 percent for the U.S. and Mexico, respectively. Besides the technological differences between the two countries, this evidence suggests that more concentrated, less competitive banking industries can lead to higher borrowing rates and/or lower savings rates than more competitive industries. There are many other differences within these markets as well.
Motivated by the Mexican data facts, this project will build a quantitative dynamic structural model to understand how financial industrial organization impacts the return to saving there.
One of the key reasons to build a quantitative structural model of banking is to use it to conduct policy experiments. This project intends to look at two areas of policy in particular. First, this project will examine the deposit market competition in Mexico due to the government's restrictions on foreign bank participation. The model will help explain the impact of foreign competition on bank risk taking, solvency, and interest rates that savers face.
Second, the project will study the role of deposit insurance in Mexico and quantify the benefits and costs of deposit insurance as well as their impact on deposit interest rates, bank solvency, and the implied costs of deposit insurance.
Research Questions:
- What is the impact of government financial policies that can be adapted and applied to developing countries?
- How does the industrial organization of financial service providers affect bank solvency and savings options across the business cycle?
- What are the competitions that reflects the actual market share of financial service providers in countries where banking is consolidated in a limited number of banks?
- How can partial equilibrium analysis of financial markets be applied to general equilibrium so that spillovers to other markets can be considered?
- How do government policies impact costs that households must bear associated with bank insolvency?
Data Notes:
This project relies on existing data from the following sources:
- Consolidated Report of Condition and Income (known as Call Reports) which banks submit to the Federal Reserve quarterly.
- This project relies on a dataset spanning from 1976 to 2008, using data from the last quarter of each year.
- All financial data are on an individual bank basis.
- Bankscope, which provides a panel dataset of balance sheets from Mexican banks.
Status:
Completed