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Bank Size and Risk-Taking under Basel II

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  • Hakenes, Hendrik

    (Sonderforschungsbereich 504)

  • Schnabel, Isabel

    (Sonderforschungsbereich 504)

Abstract

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.

Suggested Citation

  • Hakenes, Hendrik & Schnabel, Isabel, 2005. "Bank Size and Risk-Taking under Basel II," Sonderforschungsbereich 504 Publications 05-07, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  • 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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    More about this item

    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
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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