Strategic effects of regulatory capital requirements in imperfect banking competition

Eva Schliephake*, Roland Kirstein

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

10 Citations (Scopus)

Abstract

This paper analyzes the competitive effects of regulatory minimum capital requirements on an oligopolistic loan market. Before competing in loan rates banks choose their capital structure, thereby making an imperfect commitment to a loan capacity. It is shown that due to this imperfect commitment, regulatory requirements not only increase the marginal cost of loan supply, but can also have a collusive effect resulting in increased profits. This paper derives the threshold value from which capital requirements can turn one round Bertrand competition into a two-stage interaction with capacity commitment, leading to Cournot outcomes. Therefore, it provides theoretical support for the applicability of the Cournot approach when modeling imperfect loan competition.
Original languageEnglish
Pages (from-to)675-700
Number of pages26
JournalJournal of Money, Credit and Banking
Volume45
Issue number4
DOIs
Publication statusPublished - Jun 2013
Externally publishedYes

Keywords

  • Capacity constraint
  • Capital regulation
  • Oligopoly

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