Abstract

http://ssrn.com/abstract=813066
 
 

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Credit Market Competition and Capital Regulation


Franklin Allen


University of Pennsylvania - Finance Department; European Corporate Governance Institute (ECGI)

Elena Carletti


European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS); University of Frankfurt - Center for Financial Studies

Robert Marquez


University of California, Davis

January 13, 2008

Robert H. Smith School Research Paper No. RHS 06-37
Wharton Financial Institutions Center Working Paper No. 05-27
CFS Working Paper No. 2005/23
FEDS Working Paper No. 2006-11
EFA 2006 Zurich Meetings

Abstract:     
It is commonly believed that equity finance for banks is more costly than deposits. This suggests that banks should economize on the use of equity and regulatory constraints on capital should be binding. Empirical evidence suggests that in fact this is not the case. Banks in many countries hold capital well in excess of regulatory minimums and do not change their holdings in response to regulatory changes. We present a simple model of bank moral hazard that is consistent with this observation. In perfectly competitive markets, banks can find it optimal to use costly capital rather than the interest rate on the loan to guarantee monitoring because it allows higher borrower surplus.

Number of Pages in PDF File: 62

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Date posted: October 9, 2005 ; Last revised: January 26, 2014

Suggested Citation

Allen, Franklin and Carletti, Elena and Marquez, Robert, Credit Market Competition and Capital Regulation (January 13, 2008). Robert H. Smith School Research Paper No. RHS 06-37; Wharton Financial Institutions Center Working Paper No. 05-27; CFS Working Paper No. 2005/23; FEDS Working Paper No. 2006-11; EFA 2006 Zurich Meetings. Available at SSRN: http://ssrn.com/abstract=813066 or http://dx.doi.org/10.2139/ssrn.813066

Contact Information

Franklin Allen (Contact Author)
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-3629 (Phone)
215-573-2207 (Fax)
HOME PAGE: http://finance.wharton.upenn.edu/~allenf/

European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Elena Carletti
European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )
Via dei Roccettini 9
via delle Fontanelle 10
50016 San Domenico di Fiesole, Florence 50014
Italy
University of Frankfurt - Center for Financial Studies ( email )
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany
49 69 24 29 41 17 (Phone)
49 69 24 29 41 77 (Fax)
Robert S. Marquez
University of California, Davis ( email )
One Shields Avenue
Davis, CA 95616
United States
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