T1: Regulation, Competition and Financial Stability

Project Start:01/2016
Status:Completed
Researchers:Brigitte Haar, Rainer Haselmann, Casimiro Antonio Nigro, Katharina Petricevic, Katharina Pistor, Vikrant Vig, Shiwei Yu, Christine Zulehner
Category: Financial Intermediation, Law and Finance, Systemic Risk Lab
Funded by:LOEWE

We want to investigate the impact of regulatory design on competition among banks and other financial institutions as well as the resulting consequences for the real sector and financial stability. We start by focusing on the introduction of model based regulation in Germany. This reform allowed banks opting for the new regulation to reduce capital charges. Since fixed costs associated with the introduction of model based regulation were very high, this option was not feasible for smaller banks. Large banks that require on average less capital charges are likely to expand their market shares at the expenses of smaller banks (concentration effect). Furthermore, larger banks are likely to focus especially on low risk borrowers leaving smaller banks with more risky borrowers (segmentation effect).

The project proposal includes four projects that aim at investigating these effects using different methodologies: First, we aim at empirically investigating the impact of this reform on competition in lending markets for different lending segments as well as the real effects for especially informationally sensitive borrowers. Using the reform as a quasi-natural experiment, we exploit micro level data on loan quantities and prices from Deutsche Bundesbank. Previous findings can only provide estimates about the specific reform. To provide welfare effects as well as estimates of forward looking analysis, we introduce a structural analysis including the estimation of firms’ demand for credit loans in the second project. Third, we aim at providing a legal analysis to capture the empirical findings on the basis of competition rules and to derive better conclusions, having well-reasoned information about the real effects of potentially anticompetitive lending behavior. Ultimately, this should show the interaction and interdependence of seemingly quite diverse types of regulatory design, i.e. regulation targeted towards systemic risk and rules aiming for a competitive market structure. Finally, we show how the changes in the structure of lending markets affects financial stability using empirical measures of systemic risk and discuss potential consequences of alternative regulatory responses. The aim of this last project is to obtain evidence-based policy advice for designing regulation that results in a more stable financial system.

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