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Regulatory Impacts on Banking Behavior & Financial Stability: Insights from a Mixed-Oligopoly Model

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  • Eleni Dalla

    (Democritus University of Thrace)

Abstract

The recent banking crisis has raised critical questions about financial stability and the effectiveness of banking regulation. This paper examines the regulatory implications for banking conduct within a Cournot-Bertrand mixed-oligopoly framework featuring differentiated banking products. The analysis considers two banks adopting asymmetric strategies: bank 1 operates under Cournot competition and determines quantities, while bank 2 follows Bertrand strategies and sets interest rates. Public intervention is modelled through minimum capital requirements imposed by regulatory authorities. The results indicate that stringent regulation weakens the transmission of monetary policy, while it enhances financial stability. Moreover, it decreases the optimal interest rate spread, with the outcome contingent on the specific bank strategies employed by banks. The findings highlight the pivotal role of banking conduct in shaping the consequences of regulatory and monetary policies. The calibration and simulation of the model for the Euro Area over the 2007–2023 period corroborate the theoretical insights, offering valuable implications for policy design.

Suggested Citation

  • Eleni Dalla, 2025. "Regulatory Impacts on Banking Behavior & Financial Stability: Insights from a Mixed-Oligopoly Model," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 31(3), pages 125-137, August.
    • Handle: RePEc:kap:iaecre:v:31:y:2025:i:3:d:10.1007_s11294-025-09932-6
    DOI: 10.1007/s11294-025-09932-6
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    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
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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