Role of Non-Performing Loans (Npls) and Capital Adequacy in Banking Structure and Competition
University of Bath School of Management Working Paper No. 2006.16
CCP Working Paper No. 06-15
33 Pages Posted: 21 Oct 2006
Date Written: September 2006
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.
Keywords: non-performing loans, capital adequacy, banking structure, regulation, competition
JEL Classification: G21, G28, L13, L59, M41
Suggested Citation: Suggested Citation
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