Capital Requirements, Market Power and Risk-Taking in Banking

Rafael Repullo

Working Papers from CEMFI

Abstract: This paper presents a dynamic model of imperfect competition in banking where the banks can invest in a prudent or a gambling asset. We show that if intermediation margins are small, the banks’ franchise values will be small, and in the absence of regulation only a gambling equilibrium will exist. In this case, either flat-rate capital requirements or binding deposit rate ceilings can ensure the existence of a prudent equilibrium, although both have a negative impact on deposit rates. Such impact does not obtain with either risk-based capital requirements or nonbinding deposit rate ceilings, but only the former are always effective in controlling risk-shifting incentives.

Date: 2002
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Capital requirements, market power, and risk-taking in banking (2004)
Working Paper: Capital Requirements, Market Power and Risk-Taking in Banking (2003)
Working Paper: Capital requirements, market power, and risk-taking in banking (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2002_0208

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