University of Hertfordshire

Documents

  • B. Saha
  • R. Sensarma
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Original languageEnglish
PublisherUniversity of Hertfordshire
Publication statusPublished - 2009

Publication series

NameUH Business School Working Paper
PublisherUniversity of Hertfordshire

Abstract

Recent events have led many governments to buy equity in banks leading to a situation of mixed oligopoly in banking markets. We model such a case where a partially state-owned bank competes with a private bank in collecting deposits. The government is purely a welfare maximiser while the private bank maximises profits. Both banks face risks in the loan market. We show that if the risk of default is sufficiently high and there is limited liability, then the state-owned bank tries to mitigate depositors' losses by mobilising less deposit leading to contraction of aggregate deposit. This contradicts the standard mixed oligopoly results in the literature.

ID: 81488