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Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition

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  • Eva Schliephake

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Roland Kirstein

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Abstract

This paper analyses the competitive effects of capital requirement regulation on an oligopolistic credit market. In the first stage, banks choose the structure of refinancing their assets, thereby making an imperfect commitment to a loan capacity as a function of the chosen degree of capitalization and the regulatory capital requirement. In the second stage, loan price competition takes place. It is shown that a capital requirement regulation may not only decrease the supply of credit through an increased marginal cost effect but can have an additional collusive enhancing effect resulting in even higher credit prices and increased profits for the banks.

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File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2010_Dateien/2010_12.pdf
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Bibliographic Info

Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 100012.

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Length: 15 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:mag:wpaper:100012

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Keywords: equity regulation; oligopoly; capacity constraint;

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References

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  1. Wagner, W.B., 2007. "Loan Market Competition and Bank Risk-Taking," Discussion Paper 2007-010, Tilburg University, Tilburg Law and Economic Center.
  2. João A. C. Santos, 2000. "Bank capital regulation in contemporary banking theory: a review of the literature," BIS Working Papers 90, Bank for International Settlements.
  3. David VanHoose, 2008. "Bank Capital Regulation, Economic Stability, and Monetary Policy: What Does the Academic Literature Tell Us?," Atlantic Economic Journal, International Atlantic Economic Society, vol. 36(1), pages 1-14, March.
  4. Allen, Franklin & Gale, Douglas, 2004. "Competition and Financial Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 453-80, June.
  5. Boccard, Nicolas & Wauthy, Xavier, 2000. "Bertrand competition and Cournot outcomes: further results," Economics Letters, Elsevier, vol. 68(3), pages 279-285, September.
  6. VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
  7. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-58, March.
  8. BOCCARD, Nicolas & WAUTHY, Xavier, 1999. "Relaxing Bertrand competition : capacity commitment beats quality differentiation," CORE Discussion Papers 1999056, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  10. Furlong, Frederick T. & Keeley, Michael C., 1989. "Capital regulation and bank risk-taking: A note," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 883-891, December.
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Cited by:
  1. Roland Kirstein & Matthias Peiss, 2013. "Quantitative Machtkonzepte in der Ökonomik," FEMM Working Papers 130004, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  2. Eva Schliephake, 2013. "When Banks Strategically React to Regulation: Market Concentration as a Moderator for Stability," FEMM Working Papers 130012, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.

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