A Model of Competition in Banking: Bank Capital vs. Expertise

Posted: 11 Jan 2002

See all articles by Andres Almazan

Andres Almazan

University of Texas at Austin - Department of Finance

Abstract

This paper presents a model of competition in the banking industry based upon the interplay of two factors: the level of capitalization of banks and their ability to monitor different types of projects (i.e., their expertise). In a setting of moral hazard with limited liability, banks must receive some rents to induce them to monitor projects diligently. The rents are decreasing in the banks' expertise and in the amount of capital that banks are able to commit to a project. This leads to a trade-off between capital and expertise. The analysis shows how shocks to bank capital and interest rates, and technological shocks can affect competition and monitoring efficiency in the banking sector.

JEL Classification: G21, G32

Suggested Citation

Almazan, Andres, A Model of Competition in Banking: Bank Capital vs. Expertise. Available at SSRN: https://ssrn.com/abstract=290811

Andres Almazan (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-4368 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/dept/finance/faculty/profiles/index.asp?addTarget=4

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