Bank Size and Risk-Taking under Basel II

Hendrik Hakenes and Isabel Schnabel

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We analyze the relationship between bank size and risk-taking under the New Basel Capital Accord. Using a model with imperfect competition and moral hazard, we show that the introduction of an internal ratings based (IRB) approach improves upon flat capital requirements if the approach is applied uniformly across banks and if the costs of implementation are not too high. However, the banks’ right to choose between the standardized and the IRB approaches under Basel II gives larger banks a competitive advantage and, due to fiercer competition, pushes smaller banks to take higher risks. This may even lead to higher aggregate risk-taking.

Keywords: Basel II; IRB approach; bank competition; capital requirements; SME financing (search for similar items in EconPapers)
JEL-codes: G21 G28 L11 (search for similar items in EconPapers)
Date: 2006-02
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Bank size and risk-taking under Basel II (2011)
Working Paper: Bank size and risk-taking under Basel II (2005)
Working Paper: Bank Size and Risk-Taking under Basel II (2005)
Working Paper: Bank Size and Risk-Taking under Basel II (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:trf:wpaper:88

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