Implications of the Imperfect Deposit Market Structure for Micro and Macro Discretionary Prudential Policies

Feghhi Kashani, Mohammad; Omidi, Majid

doi:10.52547/jemr.12.44.7

Volume 12, Issue 44 (7-2021) jemr 2021, 12(44): 7-43 | Back to browse issues page

‎ 10.52547/jemr.12.44.7

‎ 20.1001.1.22286454.1400.12.44.1.8

Mendeley

Zotero

RefWorks

Feghhi Kashani M, Omidi M. Implications of the Imperfect Deposit Market Structure for Micro and Macro Discretionary Prudential Policies. jemr 2021; 12 (44) :7-43
URL: http://jemr.khu.ac.ir/article-1-2188-en.html

Implications of the Imperfect Deposit Market Structure for Micro and Macro Discretionary Prudential Policies

Mohammad Feghhi Kashani ^*

¹, Majid Omidi²

1- Allameh Tabataba'i University , mir30kas@gmail.com
2- Allameh Tabataba'i University

Abstract: (3444 Views)

The aim of this study is to theoretically investigate the role of the bank deposit market structure in how effective micro and macro prudential policies in determining the regulatory capital of banks in combination with monetary policy. To achieve this, a partial equilibrium analytical framework has been developed that includes rational economic entities and the possibility of contagion risk in the banking system in order to achieve more explicit and tangible results. In general, it will be shown that the imperfect structure of the bank deposit market as a policy transmission channel (which is less considered in the literature) can significantly change the micro and macro implications of such policies. Specifically, the effects of these policies on allocation and stabilization efficiency will be followed in terms of the types of conceivable equilibria for deposit rates, expected net returns, expected markup, and the level of expected effort of banks operating in the banking system. Expected markup capital elasticity of banking system smaller than one at the micro and macro levels play a special role in prudential policies. Each bank interactively with other banks would shape its solutions and expectations towards upcoming states of the economy (in so doing customizing its balance sheet asset side) along with key determinants for its solvency in respecting its financial obligations to depositors and whereby touching depositors’ confidence in its performance so hard that seizing utmost share in deposit market by bidding appropriate deposit rate. The deposit rate together with the level of monitoring efforts would further hit banking sector contagion risk drawing in its associated externalities and under well-defined conditions could expose the banking system to higher fragility.

Keywords: Imperfect Market, Banking System Stability, Regulation, Contagion Risk

Full-Text [PDF 2418 kb] (954 Downloads)

Type of Study: بنیادی | Subject: پولی و مالی
Received: 2021/06/16 | Accepted: 2021/11/16 | Published: 2022/01/25

References

1. Abbasian, E., Shirkavand, S., Tehrani, R., Alimardany, E. (2019). The Effect of Bank Investment on Lending. Does Capital-Adequacy Matter?. Journal of Monetary & Banking Research, 12(41), 523-550. [In Persian]

2. Acharya, V., Engle, R., & Richardson, M. (2012). Capital shortfall: A new approach to ranking and regulating systemic risks. American Economic Review, 102(3), 59-64. [DOI:10.1257/aer.102.3.59]

3. Admati, A. R., DeMarzo, P. M., Hellwig, M. F., & Pfleiderer, P. (2010). Fallacies, irrelevant facts, and myths in the discussion of capital regulation: Why bank equity is not expensive (Vol. 86). Max Planck Inst. for Research on Collective Goods. [DOI:10.2139/ssrn.1669704]

4. Admati, A. R., DeMarzo, P. M., Hellwig, M. F., & Pfleiderer, P. C. (2013). Fallacies, irrelevant facts, and myths in the discussion of capital regulation: Why bank equity is not socially expensive. Max Planck Institute for Research on Collective Goods, 23. [DOI:10.2139/ssrn.2349739]

5. Admati, A., & Hellwig, M. (2014). The Bankers' New Clothes: What's Wrong with Banking and What to Do about It-Updated Edition. Princeton University Press. [DOI:10.1515/9781400851195]

6. Ahnert, T., Chapman, J., & Wilkins, C. (2021). Should bank capital regulation be risk sensitive?. Journal of Financial Intermediation, 46, 100870. [DOI:10.1016/j.jfi.2020.100870]

7. Allen, F., & Gale, D. (2000). Financial contagion. Journal of political economy, 108(1), 1-33. [DOI:10.1086/262109]

8. Allen, F., Carletti, E., & Marquez, R. (2011). Credit market competition and capital regulation. The Review of Financial Studies, 24(4), 983-1018. [DOI:10.1093/rfs/hhp089]

9. Angelini, P., Neri, S., & Panetta, F. (2014). The interaction between capital requirements and monetary policy. Journal of money, credit and Banking, 46(6), 1073-1112. [DOI:10.1111/jmcb.12134]

10. Amiri, H., (2018). Evaluation the Effectiveness of Selected Banks in Iran and its Relationship with Banking Internal and Macroeconomic Variables. Journal of Applied Economics Studies in Iran, 7(26), 89-114. [In Persian]

11. Arping, S. (2019). Capital regulation and bank deposits. Review of Finance, 23(4), 831-853. [DOI:10.1093/rof/rfy019]

12. Asadi, G., Soleymani, M. (2020). Investigating the Effect of Capital and Liquidity Measures on the Probability of Financial Distress in Banks. Financial Management Strategy, 8(3), 147-174. [In Persian]

13. Bebchuk, L. A., & Goldstein, I. (2011). Self-fulfilling credit market freezes. The Review of Financial Studies, 24(11), 3519-3555. [DOI:10.1093/rfs/hhr086]

14. Besanko, D., & Thakor, A. V. (1992). Banking deregulation: Allocational consequences of relaxing entry barriers. Journal of Banking & Finance, 16(5), 909-932. [DOI:10.1016/0378-4266(92)90032-U]

15. Berger, A. N., & Bouwman, C. H. (2013). How does capital affect bank performance during financial crises?. Journal of financial economics, 109(1), 146-176. [DOI:10.1016/j.jfineco.2013.02.008]

16. Gale, D., & Özgür, O. (2005). Are bank capital ratios too high or too low? Incomplete markets and optimal capital structure. Journal of the European Economic Association, 690-700. [DOI:10.1162/jeea.2005.3.2-3.690]

17. Dagher, J., Dell'Ariccia, G., Laeven, L., Ratnovski, M. L., & Tong, M. H. (2020). Bank capital: a seawall approach. 62nd issue (March 2020) of the International Journal of Central Banking.‌

18. Dell'Ariccia, G., & Marquez, R. (2006). Lending booms and lending standards. The journal of finance, 61(5), 2511-2546. [DOI:10.1111/j.1540-6261.2006.01065.x]

19. Dell'Ariccia, G., & Ratnovski, L. (2019). Bailouts and systemic insurance. Journal of Banking & Finance, 105(C), 166-177. [DOI:10.1016/j.jbankfin.2019.05.019]

20. De Marco, F., Kneer, C., & Wieladek, T. (2021). The real effects of capital requirements and monetary policy: Evidence from the United Kingdom. Journal of Banking & Finance, 106237. [DOI:10.1016/j.jbankfin.2021.106237]

21. Eslamloueyan, K., Yazdanpanah, H., Khalilnezhad, Z. (2018). The Existence of a Risk-Taking Channel of Monetary Policy Transmission in Iran's Banking System. Journal of Economic Modeling Research, 8 (31), 7-40. [In Persian] [DOI:10.29252/jemr.8.31.7]

22. 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, 90(1), 147-165. [DOI:10.1257/aer.90.1.147]

23. Khoshnoud, Z., Esfandiari, M. (2014). Bank Lending and Capital Adequacy: A Comparison between Public and Private Banks in Iran. Journal of Monetary & Banking Research, 7(20), 211-235. [In Persian]

24. Khoshnoud, Z., Esfandiari, M. (2015). The Main Determinants of Business Cycles in Iranian Economy: A Structural Vector Autoregressive Model, 8(25), 401-427. [In Persian]

25. Khoshnoud, Z., Esfandiari, M. (2017). Banks Capital Buffer and the Business Cycles. Journal of Monetary & Banking Research, 9(30), 625-655. [In Persian]

26. Malherbe, F. (2020). Optimal capital requirements over the business and financial cycles. American Economic Journal: Macroeconomics, 12(3), 139-74. [DOI:10.1257/mac.20160140]

27. Matutes, C., & Vives, X. (1996). Competition for deposits, fragility, and insurance. Journal of Financial intermediation, 5(2), 184-216. [DOI:10.1006/jfin.1996.0010]

28. Mehran, H., & Thakor, A. (2011). Bank capital and value in the cross-section. The Review of Financial Studies, 24(4), 1019-1067. [DOI:10.1093/rfs/hhq022]

29. Morrison, A. D., & White, L. (2005). Crises and capital requirements in banking. American Economic Review, 95(5), 1548-1572. [DOI:10.1257/000282805775014254]

30. Pourmehr, M., Sepehrdoust, H., Naziri, M. K. (2019). Impact of Macroeconomic and Management Quality Variables on the Profitability of Private Banks; Using Structural Panel VAR Approach. Journal of Economic Modeling Research, 9(34), 201-254. [In Persian] [DOI:10.29252/jemr.9.34.201]

31. Rahmani, A., Heidari, A. (2006). Investigating the relationship between capital adequacy ratio and financial variables in the Iranian banking system. Journal of Business Management Perspective, 21&22, 185-200. [In Persian]

32. Repullo, R. (2004). Capital requirements, market power, and risk-taking in banking. Journal of financial Intermediation, 13(2), 156-182. [DOI:10.1016/j.jfi.2003.08.005]

33. Stavrakeva, V. (2020). Optimal bank regulation and fiscal capacity. The Review of Economic Studies, 87(2), 1034-1089. [DOI:10.1093/restud/rdz012]

34. Stewart, R. (2021). Improving regulatory capital allocation: a case for the internal ratings-based approach for retail credit risk exposures. Journal of Financial Regulation and Compliance. [DOI:10.1108/JFRC-08-2020-0076]

35. Talebi, M., Solgi, M. (2017). Risk and capital adequacy ratio: evidence from Iranian banks. Journal of Monetary & Banking Research, 9(30), 513-543. [In Persian]

36. Thakor, A. V. (2014). Bank capital and financial stability: An economic trade-off or a Faustian bargain?. Annu. Rev. Financ. Econ., 6(1), 185-223. [DOI:10.1146/annurev-financial-110613-034531]

37. Thakor, A. V. (2018). Post-crisis regulatory reform in banking: Address insolvency risk, not illiquidity!. Journal of Financial Stability, 37, 107-111. [DOI:10.1016/j.jfs.2018.03.009]

38. Van den Heuvel, S. J. (2008). The welfare cost of bank capital requirements. Journal of Monetary Economics, 55(2), 298-320. [DOI:10.1016/j.jmoneco.2007.12.001]