Impact of Non-cooperative Oligopoly of the Banking System on Its Pro-cyclicality in the Czech Republic

Irrational behavior of banks in the form of excessive credit expansions or contractions, as appropriate, in the course of an economic cycle, together with the subsequent intoxication of bank assets, has become the subject of many controversial regulatory measures since the 1990s. The study simulates this phenomenon using the Bayesian game, which models environment of a conflict situation with incomplete information based on historical data of the past decade in the Czech Republic. The results imply that the dominant banking strategy is – irrespectively of the behavior of other players – the strategy with inadequate risk aversion, with excessive (inadequate) optimistic or pessimistic expectations, as appropriate, depending on the economic cycle stage. The reason for this behavior that contradicts the Pareto efficiency principle is the lack of information about the portfolio strategy of other players and their mutual rivalry in terms of market share increase. The conclusions of the study bring a solution in the form of open bank cartels (cooperative oligopoly) aimed at the coordination of their strategy. The objective of this measure would be the self-regulation of the banking sector credit policy, with acceptable profits and risks for banks and tolerable terms for debtors, reflecting the given economic cycle stage.