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Banking Competition, Risk and Regulation

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  • Wilko Bolt
  • Alexander F. Tieman

Abstract

In a dynamic framework, commercial banks compete for customers by setting acceptance criteria for granting loans, while taking into account regulatory requirements. By easing its acceptance criteria a bank faces a trade-off between attracting more demand for loans, thus making higher per-period profits, and deterioration in the quality of its loan portfolio, thus tolerating a higher risk of failure. Our main results state that more stringent capital adequacy requirements lead banks to set stricter acceptance criteria, and that increased competition in the banking industry leads to riskier bank behaviour. It is shown that risk-adjusted regulation is effective. In an extension of our basic model, we show that it may be beneficial for a bank to hold more equity than prescribed by the regulator, even though issuing equity is more expensive than attracting deposits. Copyright The editors of the "Scandinavian Journal of Economics", 2004 .

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Bibliographic Info

Article provided by Wiley Blackwell in its journal The Scandinavian Journal of Economics.

Volume (Year): 106 (2004)
Issue (Month): 4 (December)
Pages: 783-804

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Handle: RePEc:bla:scandj:v:106:y:2004:i:4:p:783-804

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Citations

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Cited by:
  1. Philipp Hartmann & Elena Carletti, 2002. "Competition and Stability: What's Special about Banking?," FMG Special Papers, Financial Markets Group sp140, Financial Markets Group.
  2. Sophocles N. Brissimis & Manthos D. Delis & Nikolaos I. Papanikolaou, 2008. "Exploring the Nexus between Banking Sector Reform and Performance: Evidence from Newly Acceded EU Countries," Working Papers 73, Bank of Greece.
  3. Murinde, Victor & Zhao, Tianshu, 2009. "Bank competition, risk taking and productive efficiency: Evidence from Nigeria's banking reform experiments," Stirling Economics Discussion Papers, University of Stirling, Division of Economics 2009-23, University of Stirling, Division of Economics.
  4. Wilko Bolt & Alexander Tieman, 2005. "On Myopic Equilibria in Dynamic Games with Endogenous Discounting," DNB Working Papers, Netherlands Central Bank, Research Department 070, Netherlands Central Bank, Research Department.
  5. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2013. "Universal vs separated banking with deposit insurance in a macro model," Discussion Papers, Exeter University, Department of Economics 1308, Exeter University, Department of Economics.
  6. Leo de Haan & Jan Kakes, 2007. "Are non-risk based capital requirements for insurance companies binding?," DNB Working Papers, Netherlands Central Bank, Research Department 145, Netherlands Central Bank, Research Department.
  7. W. Bolt & A.F. Tieman, 2001. "When Basle II doesn't work: Contingency Rules versus Fixed Requirements," WO Research Memoranda (discontinued), Netherlands Central Bank, Research Department 681, Netherlands Central Bank, Research Department.
  8. von Peter, Goetz, 2009. "Asset prices and banking distress: A macroeconomic approach," Journal of Financial Stability, Elsevier, Elsevier, vol. 5(3), pages 298-319, September.
  9. Jakob Bosma, 2011. "Communicating Bailout Policy and Risk Taking in the Banking Industry," DNB Working Papers, Netherlands Central Bank, Research Department 277, Netherlands Central Bank, Research Department.
  10. A.F. Tieman, 2000. "Spillover of domestic regulation to emerging markets," WO Research Memoranda (discontinued), Netherlands Central Bank, Research Department 628, Netherlands Central Bank, Research Department.
  11. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2012. "Universal banking, competition and risk in a macro model," CDMA Working Paper Series 201205, Centre for Dynamic Macroeconomic Analysis.
  12. International Monetary Fund, 2008. "Innovation in Banking and Excessive Loan Growth," IMF Working Papers 08/188, International Monetary Fund.
  13. Goetz von Peter, 2004. "Asset Prices and Banking Distress: A Macroeconomic Approach," Finance, EconWPA 0411034, EconWPA.
  14. Agoraki, Maria-Eleni K. & Delis, Manthos D. & Pasiouras, Fotios, 2011. "Regulations, competition and bank risk-taking in transition countries," Journal of Financial Stability, Elsevier, Elsevier, vol. 7(1), pages 38-48, January.
  15. Chen, Xiaofen, 2007. "Banking deregulation and credit risk: Evidence from the EU," Journal of Financial Stability, Elsevier, Elsevier, vol. 2(4), pages 356-390, March.
  16. Vasiliki Makri & Athanasios Tsagkanos & Athanasios Bellas, 2014. "Determinants of Non-Performing Loans: The Case of Eurozone," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(2), pages 193-206, March.

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