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Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition

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  • EVA SCHLIEPHAKE
  • ROLAND KIRSTEIN

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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Suggested Citation

  • Eva Schliephake & Roland Kirstein, 2013. "Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 675-700, June.
  • Handle: RePEc:mcb:jmoncb:v:45:y:2013:i:4:p:675-700
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    References listed on IDEAS

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    1. 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.
    2. Arnoud W.A. Boot & Matej Marinc, 2006. "Competition and Entry in Banking: Implications for Stability and Capital Regulation," Tinbergen Institute Discussion Papers 06-015/2, Tinbergen Institute.
    3. David VanHoose, 2008. "Bank Capital Regulation, Economic Stability, and Monetary Policy: What Does the Academic Literature Tell Us?," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 36(1), pages 1-14, March.
    4. Wolf Wagner, 2010. "Loan Market Competition and Bank Risk-Taking," Journal of Financial Services Research, Springer;Western Finance Association, vol. 37(1), pages 71-81, February.
    5. Allen, Franklin & Gale, Douglas, 2004. "Competition and Financial Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 453-480, June.
    6. Boccard, Nicolas & Wauthy, Xavier, 2000. "Bertrand competition and Cournot outcomes: further results," Economics Letters, Elsevier, vol. 68(3), pages 279-285, September.
    7. VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
    8. 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.
    9. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-258, March.
    10. 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).
    11. 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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    Citations

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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. Simone Raab & Peter Welzel, 2010. "The Economics of Regional Demarcation in Banking," Discussion Paper Series 308, Universitaet Augsburg, Institute for Economics.
    3. Ahn, Jung-Hyun & Breton, Régis, 2014. "Securitization, competition and monitoring," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 195-210.
    4. Dia, Enzo, 2013. "How do banks respond to shocks? A dynamic model of deposit-taking institutions," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3623-3638.
    5. 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.
    6. Schliephake, Eva, 2014. "When Banks Strategically React to Regulation: Market Concentration as a Moderator for Stability," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100458, Verein für Socialpolitik / German Economic Association.
    7. Chen, Zhizhen & Liu, Frank Hong & Opong, Kwaku & Zhou, Mingming, 2017. "Short-term safety or long-term failure? Empirical evidence of the impact of securitization on bank risk," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 48-74.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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