Banking Competition, Risk, and Regulation

WPIEA0112004 Image
Price:  $15.00

Author/Editor: Alexander F. Tieman, Wilko Bolt
Release Date: © January, 2004
ISBN : 978-1-45184-281-4
Stock #: WPIEA0112004
Stock Status: On back-order

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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.


Bank regulations , Banks and banking , Competition , Financial institutions and markets , International trade

More publications in this series: Working Papers

More publications by: Alexander F. Tieman ; Wilko Bolt