Capital regulation and competition as a moderator for banking stability

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14 Citations (Scopus)

Abstract

Capital regulation forces banks to fund a substantial amount of their investments with equity. This creates a buffer against losses but also increases the cost of funding. If higher funding costs translate into higher loan interest rates, the bank's assets are also likely to become more risky, which may destabilize the lending bank. This paper argues that the level of competition in the banking sector can determine whether the buffer or cost effect prevails. The endogenous level of competition may be crucial in determining the efficiency of capital regulation in undercapitalized banking sectors, with excess capacities and correlated risks.
Original languageEnglish
Pages (from-to)1787-1814
Number of pages28
JournalJournal of Money, Credit and Banking
Volume48
Issue number8
DOIs
Publication statusPublished - 1 Dec 2016
Externally publishedYes

Keywords

  • banking competition
  • capital regulation
  • financial stability

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