 Deposit competition and effectiveness of bank capital requirementsRuoning Han and Ahadul Kabir Muyeed The North American Journal of Economics and Finance, 2024, vol. 74, issue C Abstract: This paper asks how capital requirements differ in their effectiveness in the context of deposit competition and potential misreporting. We present a model in which banks face imperfect competition in the deposit market and choose between a prudent or a risky asset under each of the three capital policies: a leverage ratio, a risk-based capital ratio, and a combination of both. We consider a setting where banks might misreport risky asset choice for lower regulatory capital. We find that, without misreporting, deposit competition needs to be very high to incentivize risky asset choice under the combined policy compared to the others. When misreporting is possible, the risk-based capital ratio alone can incentivize prudent asset choice if competition is below a threshold, but exceeding the threshold renders the ratio ineffective, leading to risky asset choice and misreporting. Adding a leverage ratio can restore incentives for prudent asset choice. However, when competition is too intense, the combined policy may still be ineffective. Keywords: Bank capital requirements; Leverage ratio; Misreporting; Deposit competition; Risky asset (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:74:y:2024:i:c:s1062940824001414 DOI: 10.1016/j.najef.2024.102216 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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