The dynamics of a banking duopoly with capital regulations

Luciano Fanti

Economic Modelling, 2014, vol. 37, issue C, 340-349

Abstract: This paper analyses the dynamics of a banking duopoly game with heterogeneous and homogeneous players (as regards the type of expectations' formation), to investigate the effects of the capital requirements introduced by international accords (Basel-I in 1988 and more recently Basel-II and Basel-III), in the context of the Monti-Klein model. This analysis reveals that the policy of introducing a capital requirement tends to stabilise the market equilibrium (both with heterogeneous and homogeneous banks). Moreover, it is shown that 1) when the capital standard is reduced the market stability is lost through a flip bifurcation and subsequently a cascade of flip bifurcations may lead to periodic cycles and chaos; 2) when the expectations are heterogeneous even the case of multi-stability may be present.

Keywords: Bifurcation; Chaos; Cournot; Oligopoly; Banking; Capital regulation (search for similar items in EconPapers)
JEL-codes: C62 D43 G21 G28 L13 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: The dynamics of a banking duopoly with capital regulations (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:37:y:2014:i:c:p:340-349

DOI: 10.1016/j.econmod.2013.11.010

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