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The dynamics of a banking duopoly with capital regulations

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  • Luciano Fanti
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    Abstract

    We analyse the dynamics of a banking duopoly game with heterogeneous players (as regards the type of expectations’ formation), to investigate the effects of the capital requirements introduced by international accords (Basel-I in 1988 and more recently Basel-II and Basel-III), in the context of the Monti-Klein model. This analysis reveals that the policy of introducing a capital requirement may stabilise the market equilibrium. Moreover, we show that when the capital standard is reduced the market stability is lost through a flip bifurcation and subsequently a cascade of flip bifurcations may lead to periodic cycles and chaos. Therefore, although on the one side the capital regulation is harmful for the equilibrium loans’ volume and profit, on the other side it is effective in keeping or restoring the stability of the Cournot-Nash equilibrium in the banking duopoly.

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    Bibliographic Info

    Paper provided by Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy in its series Discussion Papers with number 2012/151.

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    Date of creation: 01 Sep 2012
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    Handle: RePEc:pie:dsedps:2012/151

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    Keywords: Bifurcation; Chaos; Cournot; Oligopoly; Banking; Capital regulation.;

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    1. Vives, Xavier, 2010. "Competition and stability in banking," IESE Research Papers D/852, IESE Business School.
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    15. 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.
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