Banking Competition, Risk, and Regulation

Author/Editor: Alexander F. Tieman ; Wilko Bolt
Publication Date: January 01, 2004
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: In a dynamic theoretical framework, commercial banks compete for customers by setting acceptance criteria for granting loans, taking regulatory requirements into account. By easing its acceptance criteria a bank faces a trade-off between attracting more demand for loans, thus making higher per period profits, and a deterioration of the quality of its loan portfolio, thus tolerating a higher risk of failure. Our main results state that more stringent capital adequacy requirements lead banks to set stricter acceptance criteria, and that increased competition in the banking industry leads to riskier bank behavior. In an extension of our basic model, we show that it may be beneficial for a bank to hold more equity than prescribed by the regulator, even though holding equity is more expensive than attracting deposits.
Series: Working Paper No. 04/11
Subject(s): Competition | Bank regulations | Netherlands

Author's Keyword(s): Banking Competition | risk profile | failure rate | capital adequacy requirements
Publication Date: January 01, 2004
ISBN/ISSN: 9781451842814/1018-5941 Format: Paper
Stock No: WPIEA0112004 Pages: 26
US$15.00 (Academic Rate:
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