Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86184
Authors: 
Boot, Arnoud W.A.
Marinc, Matej
Year of Publication: 
2006
Series/Report no.: 
Tinbergen Institute Discussion Paper 06-015/2
Abstract: 
We assess the influence of competition and capital regulation on the stability of the banking system. We particularly ask two questions: i) how does capital regulation affect (endogenous) entry; and ii) how do (exogenous) changes in the competitive environment affect bank monitoring choices and the effectiveness of capital regulation? Our approach deviates from the extant literature in that it recognizes the fixed costs associated with banks' monitoring technologies. These costs make market share and scale important for the banks' cost structures. Our most striking result is that increasing (costly) capital requirements can lead to more entry into banking, essentially by reducing the competitive strength of lower quality banks. We also show that competition improves the monitoring incentives of better quality banks and deteriorates the incentives of lower quality banks; and that precisely for those lower quality banks competition typically compromises the effectiveness of capital requirements. We generalize the analysis along a few dimensions, including an analysis of the effects of asymmetric competition, e.g. one country that opens up its banking system for competitors but not vice versa.
Subjects: 
Banking
Capital regulation
Competition
JEL: 
G21
L13
L50
Document Type: 
Working Paper

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