Bank Size and Risk-Taking Under Basel II

Hakenes, Hendrik; Schnabel, Isabel

doi:10.2139/ssrn.700581

Bank Size and Risk-Taking Under Basel II

MPI Collective Goods Preprint No. 2005/6

35 Pages Posted: 1 Jun 2005 Last revised: 5 Apr 2018

See all articles by Hendrik Hakenes

Hendrik Hakenes

Finance Group; Centre for Economic Policy Research (CEPR)

Isabel Schnabel

University of Bonn - Institute for Financial Economics and Statistics; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Date Written: March 22, 2005

Abstract

This paper discusses the relationship between bank size and risk-taking under Pillar I of the New Basel Capital Accord. Using a model with imperfect competition and moral hazard, we find that small banks (and hence small borrowers) may profit from the introduction of an internal ratings based (IRB) approach if this approach is applied uniformly across banks. However, the banks' right to choose between the standardized and the IRB approaches unambiguously hurts small banks, and pushes them towards higher risk-taking due to fiercer competition. This may even lead to higher aggregate risk in the economy.

Keywords: Basel II, IRB approach, bank competition, capital requirements, SME financing

JEL Classification: G21, G28, L11

Suggested Citation: Suggested Citation

Hakenes, Hendrik and Schnabel, Isabel, Bank Size and Risk-Taking Under Basel II (March 22, 2005). MPI Collective Goods Preprint No. 2005/6. Available at SSRN: https://ssrn.com/abstract=700581 or http://dx.doi.org/10.2139/ssrn.700581