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Market Structure, Monitoring and Capital Adequacy Regulation

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  • Thomas Gehrig

Abstract

The paper discusses effort-aversion moral hazard in banks. When the evaluation and monitoring of loans requires private management effort, monitoring efforts are sensitive to the intensity of competition in the credit market. Equilibrium loan rates incorporate an oligopoly premium and a provision for bad loans. While competition reduces the oligopoly premium it also reduces monitoring incentives. Therefore, in line with recent evidence from Switzerland, loan provisions increase under deregulation, leaving the overall effect on firms' cost of finance ambiguous. Capital adequacy regulation tends to increase effort-aversion moral hazard. Furthermore it is shown that capital standards may amplify business cycles and, counter-productively, increase systemic risk. The model suggests a certain degree of complementarity between prudential and structural regulation for the banking industry.

Suggested Citation

  • Thomas Gehrig, 1996. "Market Structure, Monitoring and Capital Adequacy Regulation," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 132(IV), pages 685-702, December.
    • Handle: RePEc:ses:arsjes:1996-iv-15
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    References listed on IDEAS

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    1. Thomas Gehrig, 1995. "Capital Adequacy Rules: Implications for Banks' Risk-Taking," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 131(IV), pages 747-764, December.
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    Citations

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    Cited by:

    1. Martin Summer, 2003. "Banking Regulation and Systemic Risk," Open Economies Review, Springer, vol. 14(1), pages 43-70, January.
    2. repec:zbw:bofrdp:2018_016 is not listed on IDEAS
    3. Doris Neu Berger, 1998. "Industrial Organization of Banking: A Review," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 5(1), pages 97-118.
    4. Koskela, Erkki & Stenbacka, Rune, 2000. "Is there a tradeoff between bank competition and financial fragility?," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1853-1873, December.
    5. Gehrig, Thomas & Iannino, Maria Chiara, 2021. "Did the Basel Process of capital regulation enhance the resiliency of European banks?," Journal of Financial Stability, Elsevier, vol. 55(C).
    6. Chiesa, Gabriella, 1998. "Information production, banking industry structure and credit allocation," Research in Economics, Elsevier, vol. 52(4), pages 409-430, December.
    7. Admati, Anat R. & DeMarzo, Peter M. & Hellwig, Martin F. & Pfleiderer, Paul, 2010. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is Not Expensive," Research Papers 2065, Stanford University, Graduate School of Business.
    8. Hans Gersbach & Jan Wenzelburger, 2001. "The Dynamics of Deposit Insurance and the Consumption Trap," CESifo Working Paper Series 509, CESifo.
    9. Hans Gersbach, 2002. "Financial Intermediation and the Creation of Macroeconomic Risks," CESifo Working Paper Series 695, CESifo.
    10. Djedidi-Kooli, Salima, 2009. "L’accès au financement des PME en France : quel rôle joué par la structure du système bancaire ?," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8354 edited by Etner, François.
    11. Arnoud W.A. Boot, 1996. "Comments on the paper by THOMAS GEHRIG: "Market Structure, Monitoring and Capital Adequacy Regulation"," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 132(IV), pages 703-706, December.
    12. Ramirez, Carlos D., 2003. "Did branch banking restrictions increase bank failures? Evidence from Virginia and West Virginia in the late 1920s," Journal of Economics and Business, Elsevier, vol. 55(4), pages 331-352.
    13. Neuberger, Doris, 1997. "Structure, Conduct and Performance in Banking Markets," Thuenen-Series of Applied Economic Theory 12, University of Rostock, Institute of Economics.
    14. Gehrig, Thomas & Iannino, Maria Chiara, 2021. "Did the Basel Process of capital regulation enhance the resiliency of European banks?," Journal of Financial Stability, Elsevier, vol. 55(C).
    15. Tlili, Rim, 2012. "Comment justifier la multibancarité au sein des PME ?," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/10919 edited by Etner, François.

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