Bank Competition and Capital Regulation

15 Pages Posted: 2 Mar 2007

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: February 26, 2007

Abstract

We analyze the effects of capital regulation on bank stability in a model where banks compete for loans and deposits, and where they face both a portfolio and an optimal contracting problem. In our setup, stricter capital regulation increases the risk of individual loans and may also increase a bank's probability of default because it relaxes the competition for loans. Therefore, capital regulation and competition have similar effects on bank stability, but with reversed signs: Stricter capital requirements tend to destabilize the banking sector when higher competition stabilizes it.

Keywords: Bank competition, loan market competition, capital regulation, risk-shifting, banking stability

JEL Classification: G21, G28, D43

Suggested Citation

Hakenes, Hendrik and Schnabel, Isabel, Bank Competition and Capital Regulation (February 26, 2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=965430 or http://dx.doi.org/10.2139/ssrn.965430

Hendrik Hakenes (Contact Author)

Finance Group ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany
+49-228-73-9225 (Phone)

HOME PAGE: http://www.finance.uni-bonn.de/hakenes

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Isabel Schnabel

University of Bonn - Institute for Financial Economics and Statistics ( email )

Adenauerallee 24-42
Bonn, 53113
Germany

HOME PAGE: http://www.finance.uni-bonn.de/schnabel

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany
+49-228-9141665 (Phone)
+49-228-9141621 (Fax)

HOME PAGE: http://www.coll.mpg.de/team/page/isabel_schnabel

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