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Regulation & oligopoly in banking: The role of banking cost structure

Eleni Dalla and Erotokritos Varelas

Journal of Economics and Business, 2019, vol. 104, issue C, -

Abstract: The post-2008 financial crisis EU banking sector is characterized by recapitalization, a reduction in the number of credit institutions, and cost efficiencies due to the presence of economies of scope. This paper investigates the role of the banking cost structure as a factor influencing the regulatory impact on banking conduct under oligopolistic conditions. Applying the industrial organization approach to banking, commercial banks operate in the context of a two-stage Cournot game with economies of scope and public intervention. This intervention takes the form of minimum solvency requirements imposed by banking authorities. Higher capital provides a buffer against losses on banks’ assets and enhances financial stability. The findings show that stricter prudential regulation reduces loan rates and the interest rate spread. Also, the analysis suggests that banking regulation weakens the effectiveness of monetary policy. Thus, in terms of practical implication, banking supervision strategy should take into consideration the banking cost structure.

Keywords: Capital requirements; Regulation; Monetary policy; Economies of scope (search for similar items in EconPapers)
JEL-codes: D43 E52 G21 G28 L13 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jeconbus.2019.02.002

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