Banking competition, monitoring incentives and financial stability

VO Thi Quynh Anh ()
Additional contact information
VO Thi Quynh Anh: Norges Bank (Central Bank of Norway)

No 2010/16, Working Paper from Norges Bank

Abstract: This paper addresses the desirability of competition in banking industry. In a model where banks compete on both deposit and loan markets and where banks can use monitoring technology to control entrepreneurs' behavior, we investigate three questions: what are the effects of competition on banks' monitoring incentives? Does competition hurt banks' stability? What can be devices to correct potential negative effcts of competition vis à vis financial stability? We find that impacts of competition on banks' monitoring incentives can be decomposed into two effects: one on the attractiveness of monitoring and the other on the monitoring efficiency. The first effect operates through the link between competition and loan margin. The second effect comes from the fact that marginal effct of monitoring on entrepreneur's effort depends on loan rate. We characterize the sufficient condition under which competition will increase monitoring incentives as well as banks' stability. For the third question, we focus on the role of capital requirement and claim that with capital requirement, we can attain a weak correction but not strong correction.

JEL-codes: G21 G28 D43 D82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-com and nep-ind
Date: 2010-08-31
References: Add references at CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.norges-bank.no/en/about/published/publi ... pers/2010/wp-201016/

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:bno:worpap:2010_16

Access Statistics for this paper

More papers in Working Paper from Norges Bank
Contact information at EDIRC.
Series data maintained by ().