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Banking Competition, Risk and Regulation

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Author Info
Wilko Bolt
Alexander F. Tieman

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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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Publisher Info
Article provided by Blackwell Publishing 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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. repec:fth:bfdipa:21/00 is not listed on IDEAS
  2. Joe Peek & Eric Rosengren, 1991. "The capital crunch: neither a borrower nor a lender be," Working Papers 91-4, Federal Reserve Bank of Boston. [Downloadable!]
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  3. P.J.G. Vlaar, 2000. "Capital requirements and competition in the banking industry," WO Research Memoranda (discontinued) 634, Netherlands Central Bank, Research Department. [Downloadable!]
  4. Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, vol. 44(1), pages 1-34, January. [Downloadable!] (restricted)
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  5. Jokivuolle, Esa & Kauko, Karlo, 2001. "The New Basel Accord: some potential implications of the new standards for credit risk," Research Discussion Papers 2/2001, Bank of Finland. [Downloadable!]
  6. Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May. [Downloadable!] (restricted)
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  7. Perotti, Enrico C. & Suarez, Javier, 2002. "Last bank standing: What do I gain if you fail?," European Economic Review, Elsevier, vol. 46(9), pages 1599-1622, October. [Downloadable!] (restricted)
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  8. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937.
  9. Peter J.G. Vlaar, 2000. "Capital requirements and competition in banking industry," Working Paper Series WP-00-18, Federal Reserve Bank of Chicago. [Downloadable!]
  10. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn. [Downloadable!] (restricted)
  11. Cordella, Tito & Levy Yeyati, Eduardo, 1998. "Public Disclosure and Bank Failures," CEPR Discussion Papers 1886, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Bhattacharya, Sudipto & Boot, Arnoud W A & Thakor, Anjan V, 1998. "The Economics of Bank Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 745-70, November.
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  13. Stephen F. LeRoy, 1990. "Mutual deposit insurance," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Jun 8. [Downloadable!]
  14. Skander Van den Heuvel, 2006. "The Bank Capital Channel of Monetary Policy," 2006 Meeting Papers 512, Society for Economic Dynamics. [Downloadable!]
  15. repec:fth:bfdipa:2/2001 is not listed on IDEAS
  16. Chu, Kam Hon, 1999. "Free Banking and Information Asymmetry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 748-62, November.
  17. C. H. Furfine, 2000. "Evidence on the response of US banks to changes in capital requirements," BIS Working Papers 88, Bank for International Settlements. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Philipp Hartmann & Elena Carletti, 2002. "Competition and stability: what's special about banking?," Working Paper Series 146, European Central Bank. [Downloadable!]
    Other versions:
  2. Agoraki, Maria-Eleni & Delis, Manthos D & Pasiouras, Fotios, 2009. "Regulations, competition and bank risk-taking in transition countries," MPRA Paper 16495, University Library of Munich, Germany. [Downloadable!]
  3. Alexander F. Tieman & Daniel C. L. Hardy, 2008. "Innovation in Banking and Excessive Loan Growth," IMF Working Papers 08/188, International Monetary Fund. [Downloadable!]
  4. Wilko Bolt & Alexander Tieman, 2005. "On Myopic Equilibria in Dynamic Games with Endogenous Discounting," DNB Working Papers 070, Netherlands Central Bank, Research Department. [Downloadable!]
  5. A.F. Tieman, 2003. "Spillover of Domestic Regulation to Emerging Markets," DNB Staff Reports (discontinued) 90, Netherlands Central Bank. [Downloadable!]
    Other versions:
  6. Goetz von Peter, 2004. "Asset Prices and Banking Distress: A Macroeconomic Approach," Finance 0411034, EconWPA. [Downloadable!]
    Other versions:
  7. 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. [Downloadable!]
    Other versions:
  8. W. Bolt & A.F. Tieman, 2001. "When Basle II doesn't work: Contingency Rules versus Fixed Requirements," WO Research Memoranda (discontinued) 681, Netherlands Central Bank, Research Department. [Downloadable!]
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