Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition

This paper analyzes the competitive effects of regulatory minimum capital requirements on an oligopolistic loan market. Before competing in loan rates banks choose their capital structure, thereby making an imperfect commitment to a loan capacity. It is shown that due to this imperfect commitment, r...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2013-06, Vol.45 (4), p.675-700
Main Authors: SCHLIEPHAKE, EVA, KIRSTEIN, ROLAND
Format: Article
Language:English
Subjects:
Bank capital
Bank earnings
Bank loans
Banking
Banking industry
Banking regulation
capacity constraint
capital regulation
Capital requirements
Capital structure
Capital utilization
Competition between banks
Demand loans
Economic competition
G21
K23
L13
Loan rates
Loans
Marginal costs
Oligopoly
Profit
Strategic planning
Studies
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Summary:This paper analyzes the competitive effects of regulatory minimum capital requirements on an oligopolistic loan market. Before competing in loan rates banks choose their capital structure, thereby making an imperfect commitment to a loan capacity. It is shown that due to this imperfect commitment, regulatory requirements not only increase the marginal cost of loan supply, but can also have a collusive effect resulting in increased profits. This paper derives the threshold value from which capital requirements can turn one round Bertrand competition into a two-stage interaction with capacity commitment, leading to Cournot outcomes. Therefore, it provides theoretical support for the applicability of the Cournot approach when modeling imperfect loan competition.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12020