The Industrial Organization of Banking: Bank Behavior, Market Structure, and Regulation 3rd

This book provides an evaluation of the industrial organization of banking with a focus on the interrelationship among bank behavior, market structure, and regulation. It addresses a wide range of public policy topics, including bank competition and risk, international banking, antitrust issues, and capital regulation. New to this edition, which has been updated throughout, is a broadened consideration of alternative theories of competition among banks, which includes discussions of such issues as the implications of large increases in bank reserve holdings in recent years, effects of nonprice competition through quality rivalry, analysis of mixed market structures involving both large and small banks, and international interactions of banks and policymakers. The intent of the book is to serve as a learning tool and reference for graduate students, academics, bankers, and policymakers seeking to better understand the industrial organization of the banking sector and the effects of banking regulations. Acknowledgments Contents Chapter 1: The Banking Environment: Stocks, Flows, Information, and Risks Three Fundamental Areas Within the Industrial Organization of Banking Objectives Bank Behavior and the Structure of Banking Markets Bank Competition and Public Policy Assessing Bank Regulation The Bank Balance Sheet Bank Assets Loans Securities Cash Assets Trends in US Bank Asset Allocations Bank Liabilities and Equity Capital Large-Denomination Time Deposits Transactions Deposits, Savings Deposits, and Small-Denomination Time Deposits Purchased Funds and Subordinated Notes and Debentures Bank Capital Trends in Bank Liabilities and Equity Capital The Bank Income Statement Interest Income Noninterest Income Interest Expenses Expenses for Loan Loss Provisions Real Resource Expenses Bank Profitability Measures Asymmetric Information and Risks in Banking Adverse Selection Moral Hazard Risks on the Balance Sheet Credit Risk Market Risks Liquidity Risk Systemic Risk Trends in US Banking Industry Structure The Number of Commercial Banks Mergers, Acquisitions, and Concentration Chapter 2: Modeling the Banking Firm Under Perfect Competition Versus Monopoly Identifying the Outputs and Inputs of a Bank What Banks Do: Alternative Perspectives on Bank Production Assessing the Economic Outputs and Inputs of Banks Banks as Portfolio Managers The Basic Bank Portfolio-Management Model Limitations of Portfolio Management Models Banks as Firms Banks ́ Utilization of Real Resources and Implications for Relationship Between Loans and Deposits Implicit Resource Costs Within a Model of Perfectly Competitive Banks A Static Banking Model Perfectly Competitive Markets for Bank Assets Perfectly Competitive Markets for Bank Liabilities Evaluating Properties of a Static Perfectly Competitive Banking System Fundamental Dynamics in a Perfectly Competitive Banking Model and Implications for Portfolio Separation The Non-Implications of the Upsurge in Reserve Holdings for the Industrial Organization of Retail Banking Markets Monopolistic and Monopsonistic Banking Markets Monopolistic and Monopsonistic Interest Rate Determination in Bank Loan and Deposit Markets Social Losses due to Imperfect Competition in Banking Chapter 3: Alternative Models of Imperfect Competition in Banking Markets Oligopoly and Oligopsony in Banking Markets Cournot-Style Quantity-Setting Rivalry Fixed Costs and Endogenous Rivalry Among Banks Structural Asymmetry of Loan and Deposit Markets: The Dominant-Bank Model A Dominant-Bank Model Strategic Entry Deterrence Extending the Dominant-Bank Model: Cournot Rivalry Among a Set of Dominant Banks Monopolistic and Monopsonistic Competition in Banking Markets A Chamberlin-Style Approach Monopolistic and Monopsonistic Competition with Horizontal Product Differentiation Bank Rivalry for Loans and Deposits with Horizontal and Vertical Product Differentiation Accounting for Simultaneous Horizontal and Vertical Quality Differentiation in a Banking Framework Fundamental Implications of Vertically Differentiated Quality Rivalry Among Banks Quality Rivalry and Internalized and Externalized Portfolio Interdependence Vertical Quality Rivalry and the Mutual Coexistence of Large and Small Banks Chapter 4: The Industrial Economics of Banking The Structure-Conduct-Performance Paradigm in Banking Evaluating the Applicability of the SCP Paradigm to the Banking Industry Traditional SCP Evidence from Cross-Sectional Banking Data Dynamic Interest Rate Responses: Competition and Pass-Through Effects The Conduct and Relative Performances of Large and Small Banks Market Structure and Bank-Customer Relationships Basic Market-Structure Implications of Bank-Customer Relationships Evidence on Bank-Customer Relationships Determinants and Impacts of Bank-Customer Relationships Competition and Relationship Lending The Efficient Structure Theory and Banking Costs The Efficient Structure Challenge to the SCP Paradigm Banking Efficiency and Costs Evidence Regarding the Efficient Structure Theory Efficient Structure Theory and Bank Performance Endogenous Sunk Fixed Costs and Banking Industry Structure Endogenous Sunk Costs and Concentration Non-Price Competition in Banking: Implicit Deposit Rates versus Quality Rivalry Evidence on Advertising Outlays in the Banking Industry Endogenous Sunk Costs and the Banking Industry Chapter 5: The Economics of International Banking The Growth of Global Banking The First Big Wave of Banking Globalization: The Colonial Period The Second Globalization Wave: The Most Recent Decades Fundamental Structural Elements Influencing Cross-Border Banking Distance Competitive Structure and Effects of Entry in Host-Country Banking Markets Bank Size and Entry Costs Idiosyncratic Elements and Prior Experience The Industrial Organization of Multinational Banking Determinants of the Overall Scope of Foreign Direct Investment in Banking Greenfield Investment versus Acquisitions of Host Nations ́ Banks Real-Resource-Based Analyses of Cross-Border Trade in Banking Services Differences in Nation ́s Capital-Labor Ratios and Efficiencies as Determinants of Cross-Border Banking The Structure of Niepmann ́s Framework for a Closed Economy Extending Niepmann ́s Setup to a Two-Country Environment An Intra-Industry Model of International Trade in Banking Services A Closed-Economy Setting with Differentiated Banking Services A Two-Economy Environment with Traded Banking Services Evidence on the Empirical Relevance of Trade-Based Theories of International Banking Chapter 6: The Economics of Banking Antitrust Why Banks Merge Profit Enhancements from Mergers Diversification Benefits of Bank Mergers Assessing Loan and Deposit-Market Effects of Bank Consolidation Mergers in Initially Perfectly Competitive Banking Markets Mergers in Initially Imperfectly Competitive Banking Markets Evidence on the Consequences of Banking Consolidation Mergers and Market Power Evidence on Efficiency Gains from Banking Consolidation Banking Antitrust in Practice U.S. Bank Merger Guidelines The Relevant Market Merger Screening Evaluating the U.S. Bank Merger Guidelines Is the Official Relevant Banking Market Really Relevant? A Theory-Policy Mis-Match Geographical Arbitrariness in the Bank Merger Guidelines Do the Formal Guidelines Mis-Measure Market Power? Implications of Endogenous Sunk Fixed Costs Do Banking Consolidations Preclude Entry and Reduce Consumer Welfare? Rethinking Bank Merger Analysis Chapter 7: Bank Competition, Stability, and Regulation Banks as Issuers of Demandable Debt The Diamond-Dybvig Model An Optimal Risk-Sharing Contract The Diamond-Dybvig Intermediation Solution and the Problem of Runs Evaluating the Diamond-Dybvig Analysis Banks as Screeners and Monitors Evidence on Bank Monitoring Activities Evidence from Announcement Effects Evidence from Firm Investment and Bond Yields Evidence from Syndicated Loans and Loan Sales Direct Evidence of Bank Monitoring Activities A Monitoring Model with Heterogeneous Banks Behavior of Monitoring and Non-monitoring Banks Loan-Market Equilibrium and Equilibrium Monitoring The Relationship between Banking Competition and Risks Perfect Competition and Bank Risks The ``Excessive Deposit Competition ́ ́ Argument The Competition-Illiquidity Argument The Competition-Asset Risk Argument Market Power and Bank Risks: Theory and Evidence Competition and Risk: Theory Bank Size, Competition, and Risk: Evidence Deposit Insurance, ``Too Big to Fail ́ ́ Doctrine, and the Basel Standards The Distorting Effects of Deposit Insurance The Impact of the Too-Big-to-Fail Doctrine Capital Regulation and the Three Pillars of the Basel Framework Chapter 8: Capital Regulation, Bank Behavior, and Market Structure The Portfolio Management Perspective on Capital Regulation The Bank as a Competitive, Mean-Variance Portfolio Manager Facing Capital-Constrained Asset Portfolios Taking Deposit-Insurance Distortions into Account Explaining the Mixed Implications of Portfolio-Management Models Asset-Liability Management Under Capital Regulation An Incentive-Based Perspective on Capital Regulation Perfect Competition Models of Bank Capital Regulation Monopolistic Competition Models of Capital Regulation Demandable Debt, Bank Risks, and Capital Regulation Capital Regulation and Fragile Deposits Moral Hazard, Bank Lending and Monitoring, and Capital Regulation Capital Regulation and Bank Heterogeneities Adverse Selection and Capital Regulation Capital Requirements, Heterogeneous Banks, and Industry Structure Capital, Loan and Risk Adjustments, and Bank Performance Do Toughened Capital Requirements Actually Boost Bank Capital Ratios and Influence Aggregate Lending? Do Tougher Capital Regulations Yield Better Outcomes? Empirical Evidence Chapter 9: Regulation and the Structure of the Banking Industry Public Interest Versus Public-Choice Perspectives on Bank Regulation Applying the Economic Theory of Regulation to the Banking Industry Assessing the Implications of the Economic Theory of Regulation A Generalized Perspective on Evaluating Bank Regulation The Political Economy of Banking Supervision Conducted by Multiple Regulators: Is a ``Race to the Bottom ́ ́ Unavoidable? Regulatory Preferences and Bank-Closure Policies Competition Among Bank Regulators A Theory of Optimal Supervisory Choices of a Single Bank Regulator The Case of Competing Regulators A Supervisory Race to the Bottom? Is Greater Centralization of Regulatory Functions the Answer? Regulatory Compliance Costs and Industry Structure Assessing Banks ́ Costs of Basel Compliance: Economies of Regulation? Rule-of-Thumb Estimates Estimates of Basel Compliance Costs Based on Survey Data ``Economies-of-Basel ́ ́: Scale Advantages in Basel Compliance? To What Extent Do Basel Compliance Costs ``Matter ́ ́? Total Implementation Costs Effects of Basel Compliance on Ongoing Expenses Bank Regulation and Fixed Costs Regulatory Compliance Costs: A Missing Component? Implications of Endogenous Regulatory Sunk Fixed Costs Chapter 10: Macroprudential Regulation and International Policy Coordination Systemic Risk Explaining and Measuring Systemic Risk Measuring Systemic Risk Doing Something About Systemic Risk: Macroprudential Policy Implementation of Macroprudential Policy Structuring Macroprudential Regulation Fire Sales and Stress Tests Liquidity Requirements Bank Taxes and Subsidies Pitfalls of Macroprudential Regulation International Regulatory Policy Coordination Essentials of the Regulatory Policy Coordination Problem Recent Research on International Coordination of Financial Regulatory Policies Can Impediments to International Bank Regulatory Coordination Be Surmounted? References Index