Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition

Authors

  • EVA SCHLIEPHAKE,

  • ROLAND KIRSTEIN


  • This research has been made possible by a grant (KL 1455/1-1) from the German Research Foundation (Deutsche Forschungsgemeinschaft) and by the Friedrich Naumann Stiftung für die Freiheit through grants from the Federal Ministry of Education and Research (Bundesministerium für Bildung und Forschung). Helpful comments were received from Florian Buck, Thilo Liebig, Werner Neuss, Thilo Pausch, Simone Raab, Marc Steffen Rapp, and Peter Welzel. Constructive input was also given by the participants at the following conferences: the Deutsche Bundesbank Finance Research Colloquium, the 72. Annual Conference of the Verband der Hochschullehrer der Betriebswirtschaft (VHB), May 2010 in Bremen; the Annual Meeting of the European Association of Law and Economics (EALE), September 2010 in Paris; the Annual Conference of the German Economic Association (Verein für Socialpolitik), September 2010 in Kiel; and the Annual Conference of the German Law and Economics Association (GLEA), December 2010 in Wiesbaden. In addition, we are grateful for the particularly helpful comments of an anonymous referee and one editor.

Abstract

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.

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