Market structure, capital regulation and bank risk taking

This paper discusses the effect of capital regulation on the risk taking behavior of commercial banks. We first theoretically show that capital regulation works differently in different market structures of banking secto
This paper discusses the effect of capital regulation on the risk taking behavior of commercial banks. We first theoretically show that capital regulation works differently in different market structures of banking sectors. In lowly concentrated markets, capital regulation is effective in mitigating risk taking behavior because banks' franchise values are low and banks have incentives to pursue risky strategies in order to increase their franchise values. If franchise values are high, on the other hand, the effect of capital regulation on bank risk taking is ambiguous as banks lack those incentives. We then test the model predictions on a cross-country sample including 421 commercial banks from 61 countries. We find that capital regulation is effective in mitigating risk taking only in markets with a low degree of concentration. The results remain robust after accounting for financial sector development, legal system effciency, and for other country and bank-specific characteristics. Keywords: Banks, market structure, risk shifting, franchise value, capital regulation
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Metadaten
Author:Patrick Behr, Reinhard H. Schmidt, Ru Xie
URN:urn:nbn:de:hebis:30-62754
Parent Title (English):Universität Frankfurt am Main. Fachbereich Wirtschaftswissenschaften: [Working paper series / Finance and accounting] Working paper series, Finance & Accounting ; No. 195
Series (Serial Number):Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting (195)
Publisher:Univ., Fachbereich Wirtschaftswiss.
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2008
Year of first Publication:2008
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2011/05/23
Tag:banks ; capital regulation; franchise value ; market structure ; risk shifting
Institutes:Wirtschaftswissenschaften
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G28 Government Policy and Regulation
Sammlungen:Universitätspublikationen

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