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Incentive-Based Lending Capacity, Competition and Regulation in Banking

  • Chiesa, Gabriella

This paper studies moral hazard in banking due to delegated monitoring in an environment of aggregate risk and examines its implications for credit market equilibrium and regulation, in a model where banks are price competitors for loans and deposits. It provides a rationale for an incentive-based lending capacity positively linked to the bank’s capital and profit margin, for an oligopolistic market structure wherever banks have market power, and for capital requirements. Social-welfare-maximizing capital requirements are lowered in recessions, are higher the more fragmented the banking sector, and are increased when anti-competitive measures are removed. In equilibrium banks earn excessive profits and credit may be rationed.

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Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 10 (2001)
Issue (Month): 1 (January)
Pages: 28-53

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Handle: RePEc:eee:jfinin:v:10:y:2001:i:1:p:28-53
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622875

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