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Capital Regulation with Heterogeneous Banks

Andreas Barth and Christian Seckinger ()
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Christian Seckinger: Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany

No 1310, Working Papers from Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz

Abstract: We study the impact of capital regulation on the quality of the banking sector in the presence of heterogeneous banks. Closely related to Morrison and White (2005), we provide a general equilibrium framework with heterogeneous individuals that differ in their ability of successfully completing a risky investment project. In addition to the classical moral hazard problem, we identify an additional countervailing selection problem of a stricter capital regulation. More regulatory capital decreases the deposit rate and mitigates the severity of the moral hazard problem. This decrease in the deposit rate, however, comes at the cost of a worsening of the selection problem. We show that rising heterogeneity in the banking sector increases the allocation effect and thus, improves the selection among individuals.

Keywords: bank regulation; risk-taking; financial stability (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2013-12-19, Revised 2013-12-19
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https://download.uni-mainz.de/RePEc/pdf/Discussion_Paper_1310.pdf First version, 2013 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:jgu:wpaper:1310

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