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An Alternative View on Regulatory Distortions in a Competitive Financial Services Industry
- Source :
- Journal of Financial Services Research. Feb, 2001, Vol. 19 Issue 1, p27, 12 p.
- Publication Year :
- 2001
-
Abstract
- Byline: Bertrand Rime (1) Keywords: banking; competition; capital requirements Abstract: We present an alternative view on regulatory distortions in the banking industry. We use the duopoly model developed by Boot, Dezelan, and Milbourn (BDM, 2000), where a bank with low monitoring costs faces a bank with high monitoring costs. We show that when the initial level of the capital requirement is low, an increase of the minimum ratio between capital and total assets causes a higher decrease in profits at the bad bank than at the good bank. This finding contrasts with BDM's theorem 1, which predicts that a regulation imposing an identical increase in production costs on both banks will cause a greater loss in profits at the good bank than at the bad bank. We also look at the impact of an increase in the minimum ratio between capital and total assets on the profits of a representative bank in three other competitive environments identified in BDM. We find that the decrease in the representative bank's profit caused by an increase in the capital requirement is larger when the bank faces competition from an unregulated firm than when it faces a regulated competitor or no competitor at all. This result is consistent with BDM's theorem 2. Author Affiliation: (1) Swiss National Bank, Zurich, Switzerland Article History: Registration Date: 23/10/2004
Details
- Language :
- English
- ISSN :
- 09208550
- Volume :
- 19
- Issue :
- 1
- Database :
- Gale General OneFile
- Journal :
- Journal of Financial Services Research
- Publication Type :
- Academic Journal
- Accession number :
- edsgcl.161977809