Munich Personal RePEc Archive

Bank competition, securitization and risky investment

Li, Zhe and Sun, Jianfei (2011): Bank competition, securitization and risky investment.

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Abstract

We build a general equilibrium model of bank competition in which securitization is the banks�optimal choice. A symmetric capacity-constrained Bertrand competition equilibrium exists as in the directed search literature, e.g., Burdett, Shi and Wright (2001). A key feature of the model is that banks face heterogeneous projects and they can use their lending rate as a tool to compete for good projects. The competition of banks lowers the lending rate, which in turn results in a low deposit rate. Consequently, a low level of credit supply coexists with some uninvested high-return projects. The shortage of credit supply resulting from bank competition naturally motivates banks to sell their assets through securities in order to raise more funds to invest in the projects being rationed.

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