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Banking Competition, Risk, and Regulation

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  • Alexander F. Tieman
  • Wilko Bolt

Abstract

In a dynamic theoretical framework, commercial banks compete for customers by setting acceptance criteria for granting loans, taking regulatory requirements into account. By easing its acceptance criteria a bank faces a trade-off between attracting more demand for loans, thus making higher per period profits, and a deterioration of 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 behavior. 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 holding equity is more expensive than attracting deposits.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/11.

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Length: 26
Date of creation: 01 Jan 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/11

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  1. Joe Peek & Eric Rosengren, 1991. "The capital crunch: neither a borrower nor a lender be," Working Papers, Federal Reserve Bank of Boston 91-4, Federal Reserve Bank of Boston.
  2. repec:fth:bfdipa:21/00 is not listed on IDEAS
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  7. Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, Elsevier, vol. 44(1), pages 1-34, January.
  8. Jokivuolle, Esa & Kauko, Karlo, 2001. "The New Basel Accord: some potential implications of the new standards for credit risk," Research Discussion Papers, Bank of Finland 2/2001, Bank of Finland.
  9. Stephen F. LeRoy, 1990. "Mutual deposit insurance," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue jun8.
  10. repec:fth:bfdipa:2/2001 is not listed on IDEAS
  11. Bhattacharya, S. & Boot, A.W.A. & Thakor, A.V., 1995. "The Economics of Bank Regulation," Papers, Centro de Estudios Monetarios Y Financieros- 9516, Centro de Estudios Monetarios Y Financieros-.
  12. Chu, Kam Hon, 1999. "Free Banking and Information Asymmetry," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 31(4), pages 748-62, November.
  13. Tito Cordella & Eduardo Levy Yeyati, 1998. "Public Disclosure and Bank Failures," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 110-131, March.
  14. P.J.G. Vlaar, 2000. "Capital requirements and competition in the banking industry," WO Research Memoranda (discontinued), Netherlands Central Bank, Research Department 634, Netherlands Central Bank, Research Department.
  15. Peter J.G. Vlaar, 2000. "Capital requirements and competition in banking industry," Working Paper Series, Federal Reserve Bank of Chicago WP-00-18, Federal Reserve Bank of Chicago.
  16. Perotti, Enrico C. & Suarez, Javier, 2002. "Last bank standing: What do I gain if you fail?," European Economic Review, Elsevier, Elsevier, vol. 46(9), pages 1599-1622, October.
  17. Skander Van den Heuvel, 2006. "The Bank Capital Channel of Monetary Policy," 2006 Meeting Papers, Society for Economic Dynamics 512, Society for Economic Dynamics.
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