Role of Non-Performing Loads (NPLs) and Capital Adequacy in Banking Structure and Competition

Yoonhee Tina Chang ()

No 06-15, Working Papers from Centre for Competition Policy, University of East Anglia

Abstract: This paper analyses the impact of the transition from price-cap regulation (deposit/loan rate control) to rate-of-return regulation (ROA, NP:s and/or BIS ratio) on banking industry structure. A simple theoretical model of banking competition suggests that the relative dominance of the two objective functions under different regulatory regimes affects the market structure. Imposing more stringent rate-of-return regulation, whilst relaxing price-cap regulation, reduces the equilibrium number of banks. The result from the theoretical model is also supported by empirical evidence from Korea, which has undergone substantial consolidation in recent years. The empirical analysis uses a unique data set of the entire commercial banking sector in Korea between 1976 and 2003, which covers both pre- and post-banking crisis periods.

Keywords: Non-performing loans; capital adequacy; banking structure; regulation; competition (search for similar items in EconPapers)
JEL-codes: G21 G28 L13 L59 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-com and nep-reg
Date: 2006-09

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