On the Influence of capital Requirements on Competition and Risk taking in Banking
This paper focuses on the interaction between regulation and competition in an industrial organisation model. We analyse how capital requirements a.ect the pro.tability of two banks that compete as Cournot duopolists on a market for loans. Bank management of both banks choose optimal levels of loans provided, equity ratio and e.ort to reduce loan losses so as to maximise pro.ts. It is shown that the introduction of a just binding capital constraint improves the pro.tability of the constrained bank, whereas the pro.tability of its unrestricted competitor declines. Especially, if an ine.cient bank chooses a strategy that might result in bankruptcy, capital requirements are welfare improving. However, also under conditions that both banks would also never default in the absence of regulation, mild capital requirements can be bene.cial as they stimulate banks to provide more loans. Too high requirements on the other hand relatively favour the ine.cient bank, and result in welfare losses.
|Date of creation:||2003|
|Date of revision:|
|Contact details of provider:|| Postal: Postbus 98, 1000 AB Amsterdam|
Web page: http://www.dnb.nl/en/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bhattacharya, Sudipto & Boot, Arnoud W A & Thakor, Anjan V, 1998.
"The Economics of Bank Regulation,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 30(4), pages 745-70, November.
- Bhattacharya, Sudipto & Boot, Arnoud W.A. & Thakor, Anjan V., 1995. "The economics of bank regulation," DEE - Working Papers. Business Economics. WB 7082, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
- Bhattacharya, S. & Boot, A.W.A. & Thakor, A.V., 1995. "The Economics of Bank Regulation," Papers 9516, Centro de Estudios Monetarios Y Financieros-.
- Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
- David A. Marshall & Edward Simpson Prescott, 2000.
"Bank capital regulation with and without state-contingent penalties,"
Working Paper Series
WP-00-10, Federal Reserve Bank of Chicago.
- Marshall, David A. & Prescott, Edward Simpson, 2001. "Bank capital regulation with and without state-contingent penalties," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 54(1), pages 139-184, June.
- Arnoud Boot & Silva Dezõelan & Todd Milbourn, 1999. "Regulatory Distortions in a Competitive Financial Services Industry," Journal of Financial Services Research, Springer;Western Finance Association, vol. 16(2), pages 249-259, December.
- Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
- Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, March.
When requesting a correction, please mention this item's handle: RePEc:dnb:staffs:102. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rob Vet)
If references are entirely missing, you can add them using this form.