Banking competition, risk and regulation
In a dynamic framework banks compete for customers by setting lending conditions for the loans they supply, taking into account the capital adequacy requirements posed by the regulator. By easing its lend- ing conditions a bank faces a tradeoff between attracting more demand for loans, thus making higher per-period profits, and a deterioration of the quality of its loan portfolio, thus a higher risk of failure. Our main results state that more stringent capital adequacy requirements lead commercial banks to set more stringent loan conditions to their customers, and we show that increased competition in the banking in- dustry leads banks to behave more risky. In this model we also look at risk-adjusted capital requirements and show that risk-based regulation is effective. We extend the basic model to have banks choose both their lending conditions and the level of bank capital. In this extended model it turns out that it may be beneficial for a bank to hold more equity than prescribed by the regulator, even though equity is more expensive than attracting deposits. We show that the same conclusions with respect to the effectiveness of regulation hold as in the standard model.
|Date of creation:||2001|
|Date of revision:|
|Contact details of provider:|| Postal: |
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.:
- Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, June.
- Bhattacharya, S. & Boot, A.W.A. & Thakor, A.V., 1995.
"The Economics of Bank Regulation,"
9516, Centro de Estudios Monetarios Y Financieros-.
- Joe Peek & Eric Rosengren, 1993.
"The Capital Crunch: Neither A Borrower Nor A Lender Be,"
Boston College Working Papers in Economics
243, Boston College Department of Economics.
- Peek, Joe & Rosengren, Eric, 1995. "The Capital Crunch: Neither a Borrower nor a Lender Be," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 625-38, August.
- Joe Peek & Eric Rosengren, 1991. "The capital crunch: neither a borrower nor a lender be," Working Papers 91-4, Federal Reserve Bank of Boston.
- Tito Cordella & Eduardo Levy Yeyati, 1998.
"Public Disclosure and Bank Failures,"
IMF Staff Papers,
Palgrave Macmillan, vol. 45(1), pages 110-131, March.
- C. H. Furfine, 2000. "Evidence on the response of US banks to changes in capital requirements," BIS Working Papers 88, Bank for International Settlements.
- Matutes, Carmen & Vives, Xavier, 1995.
"Imperfect Competition, Risk Taking, and Regulation in Banking,"
CEPR Discussion Papers
1177, C.E.P.R. Discussion Papers.
- Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, vol. 44(1), pages 1-34, January.
- Stephen F. LeRoy, 1990. "Mutual deposit insurance," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun8.
- Jokivuolle, Esa & Kauko, Karlo, 2001. "The New Basel Accord: some potential implications of the new standards for credit risk," Research Discussion Papers 2/2001, Bank of Finland.
- Skander Van den Heuvel, 2006. "The Bank Capital Channel of Monetary Policy," 2006 Meeting Papers 512, Society for Economic Dynamics.
- Peter J.G. Vlaar, 2000. "Capital requirements and competition in banking industry," Working Paper Series WP-00-18, Federal Reserve Bank of Chicago.
- Perotti, Enrico C & Suarez, Javier, 2001.
"Last Bank Standing: What Do I Gain if You Fail?,"
CEPR Discussion Papers
2933, C.E.P.R. Discussion Papers.
- Chu, Kam Hon, 1999. "Free Banking and Information Asymmetry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 748-62, November.
- P.J.G. Vlaar, 2000. "Capital requirements and competition in the banking industry," WO Research Memoranda (discontinued) 634, Netherlands Central Bank, Research Department.
- Gary Gorton & Andrew Winton, .
"Bank Capital Regulation in General Equilibrium,"
Rodney L. White Center for Financial Research Working Papers
17-95, Wharton School Rodney L. White Center for Financial Research.
- Mitchell A. Petersen & Raghuram G. Rajan, 1994.
"The Effect of Credit Market Competition on Lending Relationships,"
NBER Working Papers
4921, National Bureau of Economic Research, Inc.
- Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May.
When requesting a correction, please mention this item's handle: RePEc:dnb:staffs:70. 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.