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Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition

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  • EVA SCHLIEPHAKE
  • ROLAND KIRSTEIN

Abstract

This paper analyzes the competitive effects of regulatory minimum capital requirements on an oligopolistic loan market. Before competing in loan rates banks choose their capital structure, thereby making an imperfect commitment to a loan capacity. It is shown that due to this imperfect commitment, regulatory requirements not only increase the marginal cost of loan supply, but can also have a collusive effect resulting in increased profits. This paper derives the threshold value from which capital requirements can turn one round Bertrand competition into a two‐stage interaction with capacity commitment, leading to Cournot outcomes. Therefore, it provides theoretical support for the applicability of the Cournot approach when modeling imperfect loan competition.

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  • Eva Schliephake & Roland Kirstein, 2013. "Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 675-700, June.
    • Handle: RePEc:wly:jmoncb:v:45:y:2013:i:4:p:675-700
    DOI: 10.1111/jmcb.12020
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    2. Saleem Bahaj & Frederic Malherbe, 2020. "The Forced Safety Effect: How Higher Capital Requirements Can Increase Bank Lending," Journal of Finance, American Finance Association, vol. 75(6), pages 3013-3053, December.
    3. Ahn, Jung-Hyun & Breton, Régis, 2014. "Securitization, competition and monitoring," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 195-210.
    4. Müller, Carola, 2022. "Capital requirements, market structure, and heterogeneous banks," IWH Discussion Papers 15/2022, Halle Institute for Economic Research (IWH).
    5. Dalla, Eleni, 2023. "Asymmetries in banking conduct: A Cournot - Bertrand model," Economics Letters, Elsevier, vol. 233(C).
    6. Chen, Zhizhen & Liu, Frank Hong & Opong, Kwaku & Zhou, Mingming, 2017. "Short-term safety or long-term failure? Empirical evidence of the impact of securitization on bank risk," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 48-74.
    7. Dia, Enzo & VanHoose, David, 2018. "Fixed costs and capital regulation: Impacts on the structure of banking markets and aggregate loan quality," Journal of Financial Stability, Elsevier, vol. 36(C), pages 53-65.
    8. Simone Raab & Peter Welzel, 2010. "The Economics of Regional Demarcation in Banking," Discussion Paper Series 308, Universitaet Augsburg, Institute for Economics.
    9. Dia, Enzo & VanHoose, David, 2023. "Macroprudential regulatory policies with a dominant-bank oligopoly and fringe banks," Journal of Economics and Business, Elsevier, vol. 124(C).
    10. Dia, Enzo, 2013. "How do banks respond to shocks? A dynamic model of deposit-taking institutions," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3623-3638.
    11. Eva Schliephake, 2013. "When Banks Strategically React to Regulation: Market Concentration as a Moderator for Stability," FEMM Working Papers 130012, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    12. Schliephake, Eva, 2014. "When Banks Strategically React to Regulation: Market Concentration as a Moderator for Stability," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100458, Verein für Socialpolitik / German Economic Association.
    13. Eva Schliephake, 2016. "Capital Regulation and Competition as a Moderator for Banking Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(8), pages 1787-1814, December.
    14. Dalla, Eleni & Varelas, Erotokritos, 2019. "Regulation & oligopoly in banking: The role of banking cost structure," Journal of Economics and Business, Elsevier, vol. 104(C), pages 1-1.

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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
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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