IDEAS home Printed from https://ideas.repec.org/p/uea/ueaccp/2006_15.html
   My bibliography  Save this paper

Role of Non-Performing Loans (NPLs) and Capital Adequacy in Banking Structure and Competition

Author

Listed:
  • Yoonhee Tina Chang

    (School of Management, University of Bath)

Abstract

This paper analyses the impact of the transition from price-cap regulation (deposit/loan rate control) to rate-of-return regulation (ROA, NPLs and/or BIS ratio) on banking industry structure. A simple theoretical model of banking competition suggests that the relative dominance of the two objective functions under different regulatory regimes affects the market structure. Imposing more stringent rate-of-return regulation, whilst relaxing price-cap regulation, reduces the equilibrium number of banks. The result from the theoretical model is also supported by empirical evidence from Korea, which has undergone substantial consolidation in recent years. The empirical analysis uses a unique data set of the entire commercial banking sector in Korea between 1976 and 2003, which covers both pre- and post- banking crisis periods.

Suggested Citation

  • Yoonhee Tina Chang, 2006. "Role of Non-Performing Loans (NPLs) and Capital Adequacy in Banking Structure and Competition," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2006-15, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    • Handle: RePEc:uea:ueaccp:2006_15
    as

    Download full text from publisher

    File URL: https://ueaeco.github.io/working-papers/papers/ccp/CCP-06-15.pdf
    File Function: main text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Robin A. Prager & Timothy H. Hannan, 1998. "Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence From The Banking Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 433-452, December.
    2. Tirole, Jean, 1994. "On banking and intermediation," European Economic Review, Elsevier, vol. 38(3-4), pages 469-487, April.
    3. Vittoria Cerasi & Barbara Chizzolini & Marc Ivaldi, 2002. "Branching and competition in the European banking industry," Applied Economics, Taylor & Francis Journals, vol. 34(17), pages 2213-2225.
    4. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    5. Hannan, Timothy H, 1991. "Foundations of the Structure-Conduct-Performance Paradigm in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(1), pages 68-84, February.
    6. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
    7. Mayer,Colin & Vives,Xavier (ed.), 1993. "Capital Markets and Financial Intermediation," Cambridge Books, Cambridge University Press, number 9780521443975, October.
    8. Soon Cho, 1994. "Dynamics of Korean Economic Development, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 25, January.
    9. Dermine, J., 1986. "Deposit rates, credit rates and bank capital : The Klein-Monti Model Revisited," Journal of Banking & Finance, Elsevier, vol. 10(1), pages 99-114, March.
    10. Matutes, Carmen & Vives, Xavier, 1996. "Competition for Deposits, Fragility, and Insurance," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 184-216, April.
    11. Baltensperger, Ernst, 1972. "Economies of Scale, Firm Size, and Concentration in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 4(3), pages 467-488, August.
    12. Theodore G. Flechsig, 1965. "The Effect Of Concentration On Bank Loan Rates," Journal of Finance, American Finance Association, vol. 20(2), pages 298-311, May.
    13. repec:bla:jindec:v:46:y:1998:i:4:p:433-52 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Prerna BAMORIYA & Rajendra JAIN, 2013. "NPA and Select Key Financial Heads: an Empirical study of Commercial Banks of India using Multiple Regression Modelling," The Journal of Accounting and Management, Danubius University of Galati, issue 2, pages 19-25, August.
    2. Arjan Tushaj & Valentina Sinaj, 2020. "Does Banking Concentration Affect Non-Performing Loans in Albania?," European Research Studies Journal, European Research Studies Journal, vol. 0(Special 1), pages 1074-1083.
    3. Habib Ur Rahman & Adam Arian & John Sands, 2023. "Does Fiscal Consolidation Affect Non-Performing Loans? Global Evidence from Heavily Indebted Countries (HICs)," JRFM, MDPI, vol. 16(9), pages 1-15, September.
    4. Arjan Tushaj & Valentina Sinaj, 2020. "The Effect of Banking Concentration on Non-Performing Loans: The Case of Albania," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 433-442.
    5. Amila Žunić & Kemal Kozarić & Emina Žunić Dželihodžić, 2021. "Non-Performing Loan Determinants and Impact of COVID-19: Case of Bosnia and Herzegovina," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(3), pages 5-22.
    6. Jayakumar, Manju & Pradhan, Rudra P. & Dash, Saurav & Maradana, Rana P. & Gaurav, Kunal, 2018. "Banking competition, banking stability, and economic growth: Are feedback effects at work?," Journal of Economics and Business, Elsevier, vol. 96(C), pages 15-41.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dell'Ariccia, Giovanni, 2001. "Asymmetric information and the structure of the banking industry," European Economic Review, Elsevier, vol. 45(10), pages 1957-1980, December.
    2. Horiuchi, Akiyoshi & Shimizu, Katsutoshi, 1998. "The deterioration of bank balance sheets in Japan: Risk-taking and recapitalization," Pacific-Basin Finance Journal, Elsevier, vol. 6(1-2), pages 1-26, May.
    3. TCHANA TCHANA, Fulbert, 2008. "Regulation and Banking Stability: A Survey of Empirical Studies," MPRA Paper 9298, University Library of Munich, Germany, revised 30 May 2008.
    4. Hyytinen, Ari & Takalo, Tuomas, 2001. "Preventing Systemic Crises through Bank Transparency," Discussion Papers 776, The Research Institute of the Finnish Economy.
    5. Kjell Bjørn Nordal, 2009. "A real options approach for evaluating the implementation of a risk‐sensitive capital rule in banks," Review of Financial Economics, John Wiley & Sons, vol. 18(3), pages 132-141, August.
    6. Gual, Jordi, 1999. "Deregulation, integration and market structure in European banking," IESE Research Papers D/397, IESE Business School.
    7. Vollmer, Uwe & Wiese, Harald, 2013. "Minimum capital requirements, bank supervision and special resolution schemes. Consequences for bank risk-taking," Journal of Financial Stability, Elsevier, vol. 9(4), pages 487-497.
    8. Xavier Vives, 2011. "Competition and Stability in Banking," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.),Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 12, pages 455-502, Central Bank of Chile.
    9. Jakob Korbinian Eberl, 2016. "The Collateral Framework of the Eurosystem and Its Fiscal Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 69.
    10. Shaffer, Sherrill, 2002. "Competitive bank pricing and adverse selection, with implications for testing the SCP hypothesis," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(3), pages 633-647.
    11. Ana Carolina Garriga, 2017. "Regulatory lags, liberalization, and vulnerability to banking crises," Regulation & Governance, John Wiley & Sons, vol. 11(2), pages 143-165, June.
    12. Alan D. Morrison & Lucy White, 2005. "Crises and Capital Requirements in Banking," American Economic Review, American Economic Association, vol. 95(5), pages 1548-1572, December.
    13. repec:zbw:bofrdp:2003_025 is not listed on IDEAS
    14. Buch, Claudia M., 1995. "Bank behavior and bad loans: Implications for reforms in Eastern Europe," Kiel Working Papers 679, Kiel Institute for the World Economy (IfW Kiel).
    15. Marcel Canoy & Machiel van Dijk & Jan Lemmen & Ruud de Mooij & Jürgen Weigand, 2001. "Competition and stability in banking," CPB Document 15.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    16. Hyytinen, Ari & Takalo, Tuomas, 2001. "Preventing Systemic Crises through Bank Transparency," Discussion Papers 776, The Research Institute of the Finnish Economy.
    17. Buch, Claudia M., 1995. "The emerging financial systems of the Eastern European economics: A progress report," Kiel Working Papers 716, Kiel Institute for the World Economy (IfW Kiel).
    18. Haucap, Justus & Heimeshoff, Ulrich & Uhde, André, 2010. "Zur Neuregulierung des Bankensektors nach der Finanzkrise: Bewertung der Reformvorhaben der EU aus ordnungspolitischer Sicht," DICE Ordnungspolitische Perspektiven 02, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    19. Flore, Raphael, 2015. "Causes of Shadow Banking - Two Regimes of Credit Risk Transformation and its Regulation," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113178, Verein für Socialpolitik / German Economic Association.
    20. Sopp, Heiko, 2018. "Interest rate pass-through to the rates of core deposits: A new perspective," Discussion Papers 25/2018, Deutsche Bundesbank.
    21. Fanti, Luciano, 2014. "The dynamics of a banking duopoly with capital regulations," Economic Modelling, Elsevier, vol. 37(C), pages 340-349.

    More about this item

    Keywords

    non-performing loans; capital adequacy; banking structure; regulation; competition;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L59 - Industrial Organization - - Regulation and Industrial Policy - - - Other

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uea:ueaccp:2006_15. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Juliette Hardmad (email available below). General contact details of provider: https://edirc.repec.org/data/esueauk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.