Regulation, Competition and Banking Markets

43 Pages Posted: 11 Aug 2014

See all articles by Stephen P. King

Stephen P. King

Monash University - Department of Economics; Productivity Commission

Rodney Maddock

Monash Business School; Victoria University - Victoria University of Technology

Date Written: August 10, 2014

Abstract

Banks use a mix of wholesale and deposit funds to finance lending. If a country is a net importer of wholesale funds, then a financial crisis in a foreign country can 'infect' the banking system by raising the cost of wholesale funds. Indeed, countries such as Australia imported a crisis through the wholesale funding market in the recent global financial crisis. We present a model to show how a rise in the costs of wholesale funding can trigger a crisis in an otherwise healthy banking sector. We also consider a range of government policies, such as 'bailouts', minimum equity requirements, entry restrictions and limits on wholesale funding, that may be deployed to prevent such a crisis. In particular, we focus on the implications of such policies for the structure and level of competition in banking and the rates paid by borrowers and received by depositors, in 'normal times'. We show that some policies, such as minimum equity requirements, can stabilise the banking sector, while ad hoc policies, such as debt guarantees or bailouts, destabilise the banking sector. Other policies, such as licensing, can limit competition but have ambiguous implications for bank stability.

Suggested Citation

King, Stephen Peter and Maddock, Rodney, Regulation, Competition and Banking Markets (August 10, 2014). CIFR Paper No. 034/2014, Available at SSRN: https://ssrn.com/abstract=2478496 or http://dx.doi.org/10.2139/ssrn.2478496

Stephen Peter King (Contact Author)

Monash University - Department of Economics ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Productivity Commission ( email )

Level 28
35 Collins St.
Melbourne, Victoria, Victoria 3000
Australia

Rodney Maddock

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Victoria University - Victoria University of Technology ( email )

P.O. Box 14428
Melbourne City, Victoria 8001
Australia

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