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Capital requirements and process innovation

Author

Listed:
  • Walter Beckert

    (Bank of England)

  • Peter Eccles

    (Bank of England)

  • Paolo Siciliani

    (Bank of England)

Abstract

This paper investigates the relationship between the optimal level minimum capital requirements aimed at preventing moral hazard by banks and banks’ incentives to invest in process innovation aimed at improving operational efficiency. We extend Hellmann et al (2000)’s dynamic model of banking competition to show that the imposition of minimum effective capital requirements aimed at preventing excessive risk-taking by banks supports, rather than hinders, investment in process innovation, thanks to the longer time horizon over which banks can expect to benefit from the efficiency improvement thereof. This is because investments in process innovation will be more valuable if banks act prudently. This in turn reduces the incentive for moral hazard with implications for the optimal level of minimum capital requirements.

Suggested Citation

  • Walter Beckert & Peter Eccles & Paolo Siciliani, 2026. "Capital requirements and process innovation," Bank of England Staff Working Paper series 1188, Bank of England.
    • Handle: RePEc:boe:boeewp:023310
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2026/capital-requirements-and-process-innovation.pdf
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    Keywords

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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
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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