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Capital Regulation with Heterogeneous Banks

Author

Listed:
  • Andreas Barth

    (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)

  • Christian Seckinger

    (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)

Abstract

We study the impact of capital regulation on the quality of the banking sector in the presence of heterogeneous banks. Closely related to Morrison and White (2005), we provide a general equilibrium framework with heterogeneous individuals that differ in their ability of successfully completing a risky investment project. In addition to the classical moral hazard problem, we identify an additional countervailing selection problem of a stricter capital regulation. More regulatory capital decreases the deposit rate and mitigates the severity of the moral hazard problem. This decrease in the deposit rate, however, comes at the cost of a worsening of the selection problem. We show that rising heterogeneity in the banking sector increases the allocation effect and thus, improves the selection among individuals.

Suggested Citation

  • Andreas Barth & Christian Seckinger, 2013. "Capital Regulation with Heterogeneous Banks," Working Papers 1310, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 19 Dec 2013.
    • Handle: RePEc:jgu:wpaper:1310
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    References listed on IDEAS

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    2. Neamtu, Ioana & Vo, Quynh-Anh, 2021. "Capital allocation, the leverage ratio requirement," Bank of England working papers 956, Bank of England.

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    More about this item

    Keywords

    bank regulation; risk-taking; financial stability;
    All these keywords.

    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

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