The money market under information asymmetries and imperfectly competitive loan and deposit markets

Information asymmetries and market structure has been widely discussed in the current financial crisis. It is suggested that the asymmetries of information could lead to a collapse of the interbank market. We propose a microeconomic model with Cournot competition in the various regional loan and deposit markets that interact with a perfect competitive interbank market. There exist risky and safe banks that differ in the probability of solvency and there also exist divergences in the supply of deposits be- tween regions. It is proved that, with private information, a situation of collapse of the interbank market emerges, and market structure plays no role in this result.

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