Open Access Journal Article

Are Banks Too Many? A Theoretical Possibility and a Policy Issue

by Gerasimos T. Soldatos a,* orcid  and  Erotokritos Varelas b orcid
a
Department of Economics, American University of Athens, Athens, Greece
b
Department of Economics, University of Macedonia, Thessaloniki, Greece
*
Author to whom correspondence should be addressed.
JEA  2023, 16; 2(1), 16; https://doi.org/10.58567/jea02010003
Received: 7 February 2023 / Accepted: 27 February 2023 / Published Online: 28 February 2023
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Abstract

Motivated by the Blackorby-Schworm (1993) observation that market outcomes may differ from those originating in market-actor optimization, this paper claims that the number of banks in the market is larger than the number justified by bank profit maximization alone or in combination with bank depositor welfare maximization. This claim is made within the context of bilateral monopoly banks and intertemporal utility maximization by bank depositors. The basic policy implication towards bank population rationalization is a minimization of the deviation away from the optimal interest rate margin at every stage of the business cycle. It is meant to be an acyclical policy though the target of optimal bank population is attainable by active countercyclical policy as well. The nature of this policy issue makes the use of macroprudential measures imperative, jointly perhaps with a fiscal-monetary policy mix. A dynamic version of the model in a Cournot environment is akin to the modeling of Minsky's hypothesis of financial fragility.

Keywords: Bank competition; Business cycles; Macroeconomic policy;
Copyright: © 2023 by Soldatos and Varelas. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.
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ACS Style
Soldatos, G. T.; Varelas, E. Are Banks Too Many? A Theoretical Possibility and a Policy Issue. Journal of Economic Analysis, 2023, 2, 16. https://doi.org/10.58567/jea02010003
AMA Style
Soldatos G T, Varelas E. Are Banks Too Many? A Theoretical Possibility and a Policy Issue. Journal of Economic Analysis; 2023, 2(1):16. https://doi.org/10.58567/jea02010003
Chicago/Turabian Style
Soldatos, Gerasimos T.; Varelas, Erotokritos 2023. "Are Banks Too Many? A Theoretical Possibility and a Policy Issue" Journal of Economic Analysis 2, no.1:16. https://doi.org/10.58567/jea02010003
APA style
Soldatos, G. T., & Varelas, E. (2023). Are Banks Too Many? A Theoretical Possibility and a Policy Issue. Journal of Economic Analysis, 2(1), 16. https://doi.org/10.58567/jea02010003

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