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Competition and Entry in Banking: Implications for Stability and Capital Regulation

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  • Boot, Arnoud W A
  • Marinc, Matej

Abstract

We assess the influence of competition and capital regulation on the stability of the banking system. We particularly ask two questions: i) how does capital regulation affect (endogenous) entry; and ii) how do (exogenous) changes in the competitive environment affect bank monitoring choices and the effectiveness of capital regulation? Our approach deviates from the extant literature in that it recognizes the fixed costs associated with banks’ monitoring technologies. These costs make market share and scale important for the banks’ cost structures. Our most striking result is that increasing (costly) capital requirements can lead to more entry into banking, essentially by reducing the competitive strength of lower quality banks. We also show that competition improves the monitoring incentives of better quality banks and deteriorates the incentives of lower quality banks; and that precisely for those lower quality banks competition typically compromises the effectiveness of capital requirements. We generalize the analysis along a few dimensions, including an analysis of the effects of asymmetric competition, e.g. one country that opens up its banking system for competitors but not vice versa.

Suggested Citation

  • Boot, Arnoud W A & Marinc, Matej, 2006. "Competition and Entry in Banking: Implications for Stability and Capital Regulation," CEPR Discussion Papers 5518, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5518
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    References listed on IDEAS

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    Cited by:

    1. Lehner, Maria & Schnitzer, Monika, 2008. "Entry of foreign banks and their impact on host countries," Journal of Comparative Economics, Elsevier, vol. 36(3), pages 430-452, September.
    2. Caporale, Guglielmo Maria & Lodh, Suman & Nandy, Monomita, 2017. "The performance of banks in the MENA region during the global financial crisis," Research in International Business and Finance, Elsevier, vol. 42(C), pages 583-590.
    3. David VanHoose, 2006. "Bank Behavior Under Capital Regulation: What Does The Academic Literature Tell Us?," NFI Working Papers 2006-WP-04, Indiana State University, Scott College of Business, Networks Financial Institute.
    4. Besancenot, Damien & Vranceanu, Radu, 2011. "Banks' risk race: A signaling explanation," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 784-791, October.
    5. Berger, Allen N. & Makaew, Tanakorn & Roman, Raluca, 2015. "Did bank borrowers benefit from the TARP program : the effects of TARP on loan contract terms," Research Working Paper RWP 15-11, Federal Reserve Bank of Kansas City.
    6. David VanHoose, 2013. "Implications of Shifting Retail Market Shares for Loan Monitoring in a Dominant-Bank Model," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(3), pages 291-316, July.
    7. David VanHoose, 2006. "Capital Regulation and Loan Monitoring in a Diverse Banking System," NFI Policy Briefs 2006-PB-13, Indiana State University, Scott College of Business, Networks Financial Institute.
    8. 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.
    9. VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
    10. Eric Van Tassel, 2009. "Sharing credit information under endogenous costs," Working Papers 09004, Department of Economics, College of Business, Florida Atlantic University.
    11. Böninghausen, Benjamin & Köhler, Matthias, 2012. "Diversification and determinants of international credit portfolios: Evidence from German banks," Discussion Papers 28/2012, Deutsche Bundesbank.
    12. Lorenzo Esposito, 2014. "Con Annibale alle porte. L'internazionalizzazione del sistema bancario e il caso italiano," Moneta e Credito, Economia civile, vol. 67(266), pages 311-338.
    13. Claudia M. Buch & Gayle L. DeLong, 2008. "Banking Globalization: International Consolidation and Mergers in Banking," IAW Discussion Papers 38, Institut für Angewandte Wirtschaftsforschung (IAW).

    More about this item

    Keywords

    banking; capital regulation; competition;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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