Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/184998
Authors: 
Müller, Carola
Year of Publication: 
2018
Series/Report no.: 
IWH Discussion Papers 14/2018
Abstract: 
I develop a theoretical model to examine the effect of capital requirements on risk taking and market structure of banks. Within a portfolio choice model, I allow for heterogeneous productivity among banks and consider the simultaneous capital regulation with a leverage ratio and a risk-weighted ratio. Regulators face a trade-off between the efficient allocation of resources and financial stability. In an oligopolistic market, risk-weighted requirements incentivise banks with high productivity to lend to low-risk firms. When a leverage ratio is introduced, these banks lose market shares to less productive competitors and react with risk-shifting into high-risk loans. While average productivity in the low-risk market falls, market shares in the high-risk market are dispersed across new entrants with high as well as low productivity.
Subjects: 
banking regulation
heterogeneous banks
banking competition
capital requirements
leverage ratio
Basel III
JEL: 
G11
G21
G28
Document Type: 
Working Paper

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