An increase in financial liberalization in the banking sector leads to a growth in competition that destroys the future profits of the banks and therefore their franchise value, – a present value of the future gains. The probability of good loans decreases and involves a moral hazard problem. It leads to bigger incentives for the banks to invest in the gamble assets.
Competition has always been regarded to be an environment of extreme risk-taking and as a result, it takes a lot of measures to control the amount invested in the risky assets, and motivation of the prudent behavior of the banks.
The most important instruments of regulation that will be taken into account in the paper are capital regulations and deposit rate ceilings in the context of dynam-ic model of imperfect competition according to Repullo (2004). In this model, banks can invest either into the prudent asset (riskless) or gambling asset (risky). Without any regulations there are two potential types of equilibrium, which are, prudent equilibrium, where the banks invest into the riskless assets and gambling equilibrium, in which the banks invest into the risky assets. The expected payoff of the prudent asset is higher than the expected payoff of the gambling asset, but the latter gives a higher return if the gamble turns out well. The intermediation margin of the banks in prudent and gambling equilibrium is equal to the relationship between the transportation costs and the number of banks. This represents the so called market power of the banks.
Inhaltsverzeichnis (Table of Contents)
- 1. Introduction
- 2. The Model According to Repullo (2004)
- 2.1. Short Description of the Model
- 2.2. Prudent Asset Equilibrium
- 2.3. Gambling Asset Equilibrium
- 2.4. The General Description of Prudent and Gambling Equilibrium with Capital Requirements
- 3. Instruments of Regulation
- 3.1. Risk-based Capital Requirements as Instrument of Regulation
- 3.2. Deposit Rate Ceilings as Instrument of Regulation
- 4. Extensions
- 4.1. Discussing the Optimal Capital Requirements
- 4.2. Capital Requirement under the Basel III
- 5. Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper examines the impact of capital requirements and deposit rate ceilings on bank behavior within a dynamic model of imperfect competition, specifically focusing on the model developed by Repullo (2004). The analysis explores how these regulatory instruments influence the equilibrium outcomes in a banking sector where banks can choose to invest in either riskless or risky assets.
- The role of capital requirements and deposit rate ceilings as regulatory instruments in the banking sector.
- The impact of these instruments on the equilibrium outcomes in a dynamic model of imperfect competition.
- The relationship between capital requirements, franchise value, and risk-taking behavior of banks.
- The effectiveness of risk-based capital requirements as a regulatory mechanism for managing risky incentives in banking.
- The potential benefits and drawbacks of alternative regulatory mechanisms, such as deposit rate ceilings.
Zusammenfassung der Kapitel (Chapter Summaries)
- Chapter 1: Introduction: This chapter introduces the context of financial liberalization and its potential impact on bank competition and risk-taking behavior. It discusses the importance of regulatory measures, such as capital requirements and deposit rate ceilings, to mitigate moral hazard and encourage prudent banking practices.
- Chapter 2: The Model according to Repullo (2004): This chapter provides a detailed description of the dynamic model of imperfect competition developed by Repullo (2004), which forms the foundation for the subsequent analysis. It introduces the concept of prudent and gambling equilibrium, highlighting the different investment strategies available to banks.
- Chapter 3: Instruments of Regulation: This chapter examines the effectiveness of capital requirements and deposit rate ceilings as regulatory instruments. It analyzes how these instruments influence the equilibrium outcomes in the model, focusing on their ability to discourage risk-taking behavior and encourage prudence.
- Chapter 4: Extensions: This chapter delves into further considerations related to the optimal level of capital requirements. It discusses the relationship between capital requirements and the franchise value of banks, exploring the potential trade-offs involved.
Schlüsselwörter (Keywords)
This paper focuses on key topics such as capital requirements, deposit rate ceilings, banking regulation, imperfect competition, risk-taking behavior, prudent and gambling equilibrium, franchise value, and dynamic models. The research examines the impact of regulatory instruments on bank behavior, exploring their effectiveness in mitigating moral hazard and promoting stability in the banking sector.
- Arbeit zitieren
- Olga Korniienko (Autor:in), 2011, Capital requirements and deposit rate ceilings as regulatory instruments in a dynamic model of imperfect competition in banking, München, GRIN Verlag, https://www.grin.com/document/208849
