Role of Non-Performing Loans (Npls) and Capital Adequacy in Banking Structure and Competition

University of Bath School of Management Working Paper No. 2006.16

CCP Working Paper No. 06-15

33 Pages Posted: 21 Oct 2006

See all articles by Yoonhee Tina Chang

Yoonhee Tina Chang

University of Bath - School of Management

Date Written: September 2006

Abstract

This paper analyses the impact of the transition from price-cap regulation (deposit/loan rate control) to rate-of-return regulation (ROA, NPLs and/or BIS ratio) on banking industry structure. A simple theoretical model of banking competition suggests that the relative dominance of the two objective functions under different regulatory regimes affects the market structure. Imposing more stringent rate-of-return regulation, whilst relaxing price-cap regulation, reduces the equilibrium number of banks. The result from the theoretical model is also supported by empirical evidence from Korea, which has undergone substantial consolidation in recent years. The empirical analysis uses a unique data set of the entire commercial banking sector in Korea between 1976 and 2003, which covers both pre- and post- banking crisis periods.

Keywords: non-performing loans, capital adequacy, banking structure, regulation, competition

JEL Classification: G21, G28, L13, L59, M41

Suggested Citation

Chang, Yoonhee Tina, Role of Non-Performing Loans (Npls) and Capital Adequacy in Banking Structure and Competition (September 2006). University of Bath School of Management Working Paper No. 2006.16, CCP Working Paper No. 06-15, Available at SSRN: https://ssrn.com/abstract=938475 or http://dx.doi.org/10.2139/ssrn.938475

Yoonhee Tina Chang (Contact Author)

University of Bath - School of Management ( email )

Bath, Avon BA2 7AY
United Kingdom
+44 (0)1225 383744 (Phone)

HOME PAGE: http://people.bath.ac.uk/ytc23

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