The Industrial Organization of Banking: Bank Behavior, Market Structure, and Regulation

The Industrial Organization of Banking: Bank Behavior, Market Structure, and Regulation

David Van Hoose

Language: English

Pages: 258

ISBN: 2:00262543

Format: PDF / Kindle (mobi) / ePub

The academic literature commonly examines issues relating to bank behavior, market structure, or bank regulation by abstracting from interrelationships among these factors. From a policy perspective, however, these elements of the industrial organization of banking are inextricably linked. The goal of this book is to provide a complete overview, exposition, and evaluation of the interplay among bank behavior, market structure, and regulation. It also considers implications for a variety of public policy issues, including bank competition and risk, market discipline, antitrust issues, capital regulation, and regulatory restructuring. The book can serve as a learning tool and reference for graduate students and academics, as well as bankers and policymakers studying the industrial organization of the banking sector and interested in the impacts of banking regulations.













use of the information revealed by subordinated debt yield spreads (see, for instance, Evanoff and Wall, 2000, Calomiris, 1999, 2004, Kwast et al., 1999, and Bliss, 2001). Among the features included in typical mandatory subordinated debt proposals are the following: 1. The inclusion of no-bailout clauses in debt contract provisions to ensure debt holders have strong incentives to monitor bank risk profiles. 2. Restrictions on holdings by bank insiders. 3. A requirement for subordinated debt

study of a panel of U.S. banks between 1977 and 1989 finds evidence supporting this hypothesis. Akhavein, et al. (2004) provide support for Alhadeff’s suggestion that relationship lending acts as a barrier to entry. Akhavein et al. examine data on loans to farms by rural U.S. banks between 1987 and 1994, and they find that the length of tenure of a farm operation leads to more lending to the farm on the part of incumbents and less lending by de novo banks. Hence, they conclude that new entrants

capital plus certain subordinated notes and debentures, other preferred stock, and mandatory convertible debt—to assets. 136 6 Bank Competition, Stability, and Regulation In 1988, in an effort to take into account heterogeneities of risks across different sets of bank assets, bank regulators of various nations agreed to adopt the so-called Basel Accord. Under this agreement, now commonly called Basel I, participating nations imposed both a traditional leverage (asset-to-capital-ratio)

effects of capital regulation. Deposits are also fixed but costly. A bank can choose portfolio shares of a risky asset and a safe asset. It faces a capital surcharge if its capital is below a minimum standard amount. Both the asset portfolio and the capital position vary over time as a result of past choices and the realization of past risky investments. Calem and Rob trace through the effects of building up a capital cushion, which can ultimately lead a bank to take on more risk in the face of

level of capital increases downside risks, which reduces the put option value of limited liability. Second, increasing the leverage ratio boosts the anticipated sanction that banks confront. Together, these effects of a higher leverage ratio increase the incentive for banks to truthfully reveal their risks under an IRB-style system. Marshall and Prescott (2001, 2006) have explored how regulators might use state-contingent pecuniary penalties to induce banks to control risks. Marshall and Prescott

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