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Abstract

We analyze the relationship between bank size and risk-taking under the New Basel Capital Accord. Using a model with imperfect competition and moral hazard, we show that the introduction of an internal ratings based (IRB) approach improves upon flat capital requirements if the approach is applied uniformly across banks and if the costs of implementation are not too high. However, the banks’ right to choose between the standardized and the IRB approaches under Basel II gives larger banks a competitive advantage and, due to fiercer competition, pushes smaller banks to take higher risks. This may even lead to higher aggregate risk-taking.

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Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 88.

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Date of creation: Feb 2006
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Handle: RePEc:trf:wpaper:88

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Related research

Keywords: Basel II; IRB approach; bank competition; capital requirements; SME financing;

Other versions of this item:

Find related papers by 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
• L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

This paper has been announced in the following NEP Reports:

• NEP-ALL-2006-02-12 (All new papers)
• NEP-FIN-2006-02-12 (Finance)
• NEP-FMK-2006-02-12 (Financial Markets)
• NEP-REG-2006-02-12 (Regulation)

References

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Cited by:

1. Allen N. Berger, 2004. "Potential competitive effects of Basel II on banks in SME credit markets in the United States," Finance and Economics Discussion Series 2004-12, Board of Governors of the Federal Reserve System (U.S.).
   
   • Allen Berger, 2006. "Potential Competitive Effects of Basel II on Banks in SME Credit Markets in the United States," Journal of Financial Services Research, Springer, vol. 29(1), pages 5-36, February.
2. Horst Gischer & Toni Richter, 2011. "'Global Player' im Bankenwesen - ökonomisch sinnvoll oder problembehaftet?," FEMM Working Papers 110012, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
3. Hege, Ulrich & Feess, Eberhard, 2007. "Basel II and the Value of Bank Differentiation," Les Cahiers de Recherche 879, HEC Paris.
4. Ines Drumond, 2009. "Bank Capital Requirements, Business Cycle Fluctuations And The Basel Accords: A Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 798-830, December.
   
   • Inês Drumond, 2008. "Bank Capital Requirements, Business Cycle Fluctuations and the Basel Accords: A Synthesis," FEP Working Papers 277, Universidade do Porto, Faculdade de Economia do Porto.
5. Camille Cornand & Céline Gimet, 2012. "The 2007-2008 financial crisis: Is there evidence of disaster myopia?," Post-Print halshs-00617127, HAL.
6. Camille Cornand & Céline Gimet, 2011. "The 2007-2008 financial crisis : Is there evidence of disaster myopia ?," Working Papers 1125, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
7. Hakenes, Hendrik & Schnabel, Isabel, 2006. "The Threat of Capital Drain: A Rationale for Public Banks?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 107, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
   
   • Hendrik Hakenes & Isabel Schnabel, 2006. "The Threat of Capital Drain: A Rationale for Public Banks?," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2006_11, Max Planck Institute for Research on Collective Goods.
8. Schlüter, Tobias & Sievers, Sönke & Hartmann-Wendels, Thomas, 2012. "How can banks effectively stabilize their retail customers saving behavior? The impact of contractual rewards on saving persistence and cash flow volatility," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62057, Verein für Socialpolitik / German Economic Association.

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