Best Paper - Volume 13

The JFI editors are pleased to announce that the JFI Stuart Greenbaum Prize for the most significant paper published in the 2004 Journal of Financial Intermediation has gone to Rafael Repullo for the paper "Capital Requirements, Market Power and Risk Taking in Banking," published in Volume 13, Issue 2. The prize carries with it a $2,500 check for the winner.

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Capital Requirements, Market Power and Risk Taking in Banking
Rafael Repullo
CEMFI, Casado del Alisal 5, 28014, Madrid, Spain, and CEPR

Abstract

This paper presents a dynamic model of imperfect competition in banking where the banks can invest in a prudent or a gambling asset. We show that if intermediation margins are small, the banks' franchise values will be small, and in the absence of regulation only a gambling equilibrium will exist. In this case, either flat-rate capital requirements or binding deposit rate ceilings can ensure the existence of a prudent equilibrium, although both have a negative impact on deposit rates. Such impact does not obtain with either risk-based capital requirements or nonbinding deposit rate ceilings, but only the former are always effective in controlling risk-shifting incentives. Journal of Economic Literature Classification Numbers: G21; G28; D43. ©2003 Elsevier Inc.