Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/159238 
Year of Publication: 
2001
Series/Report no.: 
Quaderni - Working Paper DSE No. 397
Publisher: 
Alma Mater Studiorum - Università di Bologna, Dipartimento di Scienze Economiche (DSE), Bologna
Abstract: 
This paper studies moral hazard in banking due to delegated monitoring in an environment of aggregate risk and examines its implications for credit market equilibrium and regulation, in a model where banks are price competitors for loans and deposits. It provides a rationale for an incentive-based lending capacity positively linked to the bank's capital and profit margin, for an oligopolistic market structure wherever banks have market power, and for capital requirements. Social-welfare-maximizing capital requirements are lowered in recessions, are higher the more fragmented the banking sector, and are increased when anti-competitive measures are removed. In equilibrium banks earn excessive profits and credit may be rationed.
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Working Paper

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