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Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?
Abstract
In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also have a perverse effect of harming banks' franchise values, thus encouraging gambling. Pareto-efficient outcomes can be achieved by adding deposit-rate controls as a regulatory instrument, since they facilitate prudent investment by increasing franchise values. Even if deposit-rate ceilings are not binding on the equilibrium path, they may be useful in deterring gambling off the equilibrium path. (JEL G2, E4, L5)
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Citations
Cited by
Information and the Change in the Paradigm in Economics
Stiglitz, J. E. (2002) · American Economic Review · doi:10.1257/00028280260136363 · Cited by 1,455
Self-citationBank Competition and Financial Stability
Berger, A. N., Klapper, L. F., & Turk-Ariss, R. (2009) · Journal of Financial Services Research · doi:10.1007/s10693-008-0050-7 · Cited by 1,221
Competition and Financial Stability
Allen, F., & Gale, D. (2004) · Journal of Money, Credit, and Banking · doi:10.1353/mcb.2004.0038 · Cited by 1,137
Bank competition and stability: Cross-country heterogeneity
Beck, T., De Jonghe, O., & Schepens, G. (2013) · Journal of Financial Intermediation · doi:10.1016/j.jfi.2012.07.001 · Cited by 1,021
Capital requirements, market power, and risk-taking in banking
Repullo, R. (2004) · Journal of Financial Intermediation · doi:10.1016/j.jfi.2003.08.005 · Cited by 938
Metadata
- Authors
- Hellmann, T. F., Murdock, K. C., & Stiglitz, J. E.
- Venue
- American Economic Review
- Publisher
- American Economic Association
- Published
- 2000-03-01
- Volume
- 90
- Issue
- 1
- Pages
- 147-165
- ISSN
- 0002-8282 (ISSN-L)
- OpenAlex
- W3124982262
- Cited by
- 2,088
- References
- 0
- FWCI
- 67.89
- Type
- journal article
- Language
- en
- Open access
- closed
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- Hellmann, T. F., Murdock, K. C., & Stiglitz, J. E. (2000). Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough? American Economic Review. https://doi.org/10.1257/aer.90.1.147
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Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
