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Incentive-Based Lendig Capacity, Competition and Regulation in Banking

Gabriella Chiesa ()

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: This paper studies moral hazard in banking due to delegated monitoring in an environment of aggregate risk and examines its implications for credit market equilibrium and regulation, in a model where banks are price competitors for loans and deposits. It provides a rationale for an incentive-based lending capacity positively linked to the bank’s capital and profit margin, for an oligopolistic market structure wherever banks have market power, and for capital requirements. Social-welfare-maximizing capital requirements are lowered in recessions, are higher the more fragmented the banking sector, and are increased when anti-competitive measures are removed. In equilibrium banks earn excessive profits and credit may be rationed.

Date: 2001
New Economics Papers: this item is included in nep-cse, nep-cwa, nep-fmk, nep-mic and nep-reg
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Journal Article: Incentive-Based Lending Capacity, Competition and Regulation in Banking (2001) Downloads
Working Paper: Incentive-based Lending Capacity, Competition and Regulation in Banking
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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:397

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