Optimal Banking Structure Under Demand Externality

Abstract

This paper studies optimal banking structure under demand externality. Firms operate under demand externalities. Investors choose the optimal banking coalition sizes and then try to maximize profits by optimal lending under Cournot competition. The focus of the paper is on optimal banking structure which maximizes bank profitability. It is shown that due to the demand externality facing firms, the privately optimal bank coalition has the minimum size but high lending.