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Bank Size and Risk-Taking under Basel II

  • Hakenes, Hendrik

    ()

    (Sonderforschungsbereich 504)

  • Schnabel, Isabel

    ()

    (Sonderforschungsbereich 504)

This paper discusses the relationship between bank size and risk-taking under Pillar I of the New Basel Capital Accord. Using a model with imperfect competition and moral hazard, we find that small banks (and hence small borrowers) may profit from the introduction of an internal ratings based (IRB) approach if this approach is applied uniformly across banks. However, the banks' right to choose between the standardized and the IRB approaches unambiguously hurts small banks who are pushed towards higher risk-taking due to fiercer competition. This may even lead to higher aggregate risk in the economy.

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Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 05-07.

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Length: 32 pages
Date of creation: 14 Feb 2005
Date of revision:
Handle: RePEc:xrs:sfbmaa:05-07
Note: We would like to thank Anne van Aaken, Felix Höffler, and especially Martin Hellwig for helpful comments. We also thank the participants of the XIII International ``Tor Vergata
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