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Regulation & oligopoly in banking: The role of banking cost structure

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  • Dalla, Eleni
  • Varelas, Erotokritos

Abstract

The post-2008 financial crisis EU banking sector is characterized by recapitalization, a reduction in the number of credit institutions, and cost efficiencies due to the presence of economies of scope. This paper investigates the role of the banking cost structure as a factor influencing the regulatory impact on banking conduct under oligopolistic conditions. Applying the industrial organization approach to banking, commercial banks operate in the context of a two-stage Cournot game with economies of scope and public intervention. This intervention takes the form of minimum solvency requirements imposed by banking authorities. Higher capital provides a buffer against losses on banks’ assets and enhances financial stability. The findings show that stricter prudential regulation reduces loan rates and the interest rate spread. Also, the analysis suggests that banking regulation weakens the effectiveness of monetary policy. Thus, in terms of practical implication, banking supervision strategy should take into consideration the banking cost structure.

Suggested Citation

  • Dalla, Eleni & Varelas, Erotokritos, 2019. "Regulation & oligopoly in banking: The role of banking cost structure," Journal of Economics and Business, Elsevier, vol. 104(C), pages 1-1.
    • Handle: RePEc:eee:jebusi:v:104:y:2019:i:c:4
    DOI: 10.1016/j.jeconbus.2019.02.002
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    References listed on IDEAS

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    1. An, Qingxian & Tao, Xiangyang & Chen, Xiaohong, 2023. "Nested frontier-based best practice regulation under asymmetric information in a principal–agent framework," European Journal of Operational Research, Elsevier, vol. 306(1), pages 269-285.

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    More about this item

    Keywords

    Capital requirements; Regulation; Monetary policy; Economies of scope;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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