Banking Competition, Risk, and Regulation

26 Pages Posted: 15 Feb 2006

See all articles by Wilko Bolt

Wilko Bolt

De Nederlandsche Bank (Dutch Central Bank); VU University Amsterdam

Alexander F. Tieman

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2004

Abstract

In a dynamic theoretical framework, commercial banks compete for customers by setting acceptance criteria for granting loans, taking regulatory requirements into account. By easing its acceptance criteria a bank faces a trade-off between attracting more demand for loans, thus making higher per period profits, and a deterioration of the quality of its loan portfolio, thus tolerating a higher risk of failure. Our main results state that more stringent capital adequacy requirements lead banks to set stricter acceptance criteria, and that increased competition in the banking industry leads to riskier bank behavior. In an extension of our basic model, we show that it may be beneficial for a bank to hold more equity than prescribed by the regulator, even though holding equity is more expensive than attracting deposits.

Keywords: Banking competition, risk profile, failure rate, capital adequacy requirements

JEL Classification: E44, G28, L16

Suggested Citation

Bolt, Wilko and Tieman, Alexander F., Banking Competition, Risk, and Regulation (January 2004). IMF Working Paper, Vol. , pp. 1-26, 2004. Available at SSRN: https://ssrn.com/abstract=878834

Wilko Bolt (Contact Author)

De Nederlandsche Bank (Dutch Central Bank) ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Alexander F. Tieman

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
281
Abstract Views
1,063
rank
101,643
PlumX Metrics