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Role of Non-Performing Loads (NPLs) and Capital Adequacy in Banking Structure and Competition

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  • Yoonhee Tina Chang

    ()
    (School of Management, University of Bath)

Abstract

This paper analyses the impact of the transition from price-cap regulation (deposit/loan rate control) to rate-of-return regulation (ROA, NP:s and/or BIS ratio) on banking industry structure. A simple theoretical model of banking competition suggests that the relative dominance of the two objective functions under different regulatory regimes affects the market structure. Imposing more stringent rate-of-return regulation, whilst relaxing price-cap regulation, reduces the equilibrium number of banks. The result from the theoretical model is also supported by empirical evidence from Korea, which has undergone substantial consolidation in recent years. The empirical analysis uses a unique data set of the entire commercial banking sector in Korea between 1976 and 2003, which covers both pre- and post-banking crisis periods.

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File URL: http://www.ccp.uea.ac.uk/publicfiles/workingpapers/CCP06-15.pdf
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Bibliographic Info

Paper provided by Centre for Competition Policy, University of East Anglia in its series Working Papers with number 06-15.

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Length: 33 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:ccp:wpaper:wp06-15

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Keywords: Non-performing loans; capital adequacy; banking structure; regulation; competition;

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