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Bank capital and credit market competition: Will competitive pressure lead to higher capital levels?

Yehning Chen

Journal of International Money and Finance, 2016, vol. 69, issue C, 247-263

Abstract: This paper establishes a theoretical model to study the relationship between credit market competition and bank capital. In the model, bank capital can alleviate the debt overhang problem, and the extent to which banks can enjoy the gain of holding capital is decreasing in the competitive pressure in the credit market. It is shown that credit market competition reduces banks' incentive to hold capital. Deposit insurance also induces banks to hold less capital. In addition, bank capital regulation is welfare improving, and banks may voluntarily hold capital in excess of regulatory minimums.

Keywords: Bank capital; Debt overhang; Credit market competition; Capital regulation; Deposit insurance (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.jimonfin.2016.07.006

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