IWH at 2020 ASSA Annual Meeting in San Diego
IWH at 2020 ASSA Annual Meeting in San Diego Next year’s 2020 ASSA Annual Meeting...
Reports of the European Forecasting Network (EFN)
Reports of the European Forecasting Network (EFN) The European Forecasting...
The maths behind gut decisions First carefully weigh up the costs and benefits and then make a rational...
The New Europe
The new Europe The financial crisis is largely over, yet confidence in the ECB and EU...
Borrowers Under Water! Rare Disasters, Regional Banks, and Recovery Lending ...
The Political Economy of the European Banking Union
The Political Economy of the European Banking Union ...
Fiscal Policy and Fiscal Fragility: Empirical Evidence from the OECD ...
Joint Economic Forecast
Joint Economic Forecast The joint economic forecast is an instrument for evaluating...
Basel III Capital Requirements and Heterogeneous Banks
IWH Discussion Papers,
I develop a theoretical model to investigate the effect of simultaneous regulation with a leverage ratio and a risk-weighted ratio on banks‘ risk taking and banking market structure. I extend a portfolio choice model by adding heterogeneity in productivity among banks. Regulators face a trade-off between the efficient allocation of resources and financial stability. In an oligopolistic market, risk-weighted requirements incentivise banks with high productivity to lend to low-risk firms. When a leverage ratio is introduced, these banks lose market shares to less productive competitors and react with risk-shifting into high-risk loans. While average productivity in the low-risk market falls, market shares in the high-risk market are dispersed across new entrants with high as well as low productivity.