The academic literature commonly examines issues relating to bank behavior, market
structure, or bank regulation by abstracting from interrelationships among these factors.
From a policy perspective, however, these elements of the industrial organization of
banking are inextricably linked.
The goal of this book is to provide a complete overview, exposition, and
evaluation of the interplay among bank behavior, market structure, and regulation.
It also considers implications for a variety of public policy issues, including
bank competition and risk, market discipline, antitrust issues, capital regulation, and
regulatory restructuring. The book can serve as a learning tool and reference for graduate
students and academics, as well as bankers and policymakers studying the industrial
organization of the banking sector and interested in the impacts of banking regulations.
Table of Contents
1 Introduction
Three Fundamental Areas Within the Industrial Organization of Banking
Objectives
Bank Behavior and the Structure of Banking Markets
Bank Competition and Public Policy
AssessingBankRegulation
2 The Banking Environment
The Bank Balance Sheet
BankAssets
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
AdverseSelection
Moral Hazard
Risks on the Balance Sheet
CreditRisk
MarketRisks
LiquidityRisk
SystemicRisk
Risks Off of Bank Balance Sheets
LoanCommitments
Securitization
Derivative Securities
Trends in U.S. Banking Industry Structure
Recent Patterns in U.S. Banking Structure
Mergers, Acquisitions, and Concentration
Summary: The Banking Environment
3 Alternative Perspectives on Bank Behavior
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
A Perfectly Competitive Banking Industry
Imperfectly Competitive Banking Markets
Summary: Models of the Banking Firm
4 The Industrial Economics of Banking
The Structure-Conduct-Performance Paradigm in Banking
The SCP Hypothesis with Identical Banks
Structural Asymmetry, Dominant Banks, and the SCP Paradigm
Evaluating the Applicability of the SCP Paradigm to the Banking Industry
Market Structure and Bank–Customer Relationships
Basic Market-Structure Implications of Bank–Customer Relationships 64
Evidence on Bank–Customer Relationships
The Efficient Structure Theory and Banking Costs
The Efficient Structure Challenge to the SCP Paradigm
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
Summary: The Industrial Organization of Banking
5 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
Banking Antitrust in Practice
U.S.BankMergerGuidelines
Evaluating theU.S.BankMergerGuidelines
Antitrust Issues in Bank Payment Networks
BankCards andTwo-SidedMarkets
Regulatory and Antitrust Issues in Card Payment Networks
Summary: Banking Antitrust .
6 Bank Competition, Stability, and Regulation
Banks as Issuers of Demandable Debt
The Diamond–Dybvig Model
The Diamond–Dybvig Intermediation Solution and the ProblemofRuns
Evaluating the Diamond–Dybvig Analysis
Banks as Screeners and Monitors
Evidence on Bank Monitoring Activities
A Monitoring Model with Heterogeneous Banks
The Relationship between Banking Competition and Risks
Perfect Competition and Bank Risks
Market Power and Bank Risks: Theory and Evidence
Deposit Insurance, “Too Big to Fail” Doctrine, Basel I, and Basel II
Basel I, Capital Regulation, and the Three Pillars of Basel II
Summary: Bank Competition, Stability, and Regulation
7 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
Incentives and Capital Requirements
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
AdverseSelection andCapitalRegulation
Capital Requirements, Heterogeneous Banks, and Industry Structure
Capital Regulation, Credit Shocks, and Procyclicality and Risk
Does Toughening Capital Requirements Boost Bank Capital Ratios and Create Credit Shocks?
Procycical Features of a Capital-Regulated Banking Industry
Empirical Evidence on Procyclical Effects of Capital Regulation
Summary: Capital Regulation, Bank Behavior, and Market Structure
8 Market Discipline and the Banking Industry
The Market Discipline Pillar of Basel II
The Channels of Market Discipline
Potential Benefits and Costs of Market Discipline in Banking
Evaluating Incentives for Information Disclosure .
Ways to Enhance Bank Market Discipline
Industry Structure and Market Discipline
Market Discipline in a Basic Banking Model
MarketPower, InformationDisclosure, andMarketDiscipline
Evidence on Market Discipline’s Effectiveness
Information Content of Market Prices and Bond Yield Spreads under Basel I
MarketDisciplineversusRegulation
Evidence on Bank Information Disclosure
Evaluating the Market Discipline Pillar vis-a-vis the Other Pillars of Basel II
The Limitations of Market Discipline under Basel II
Theory versus Reality under Basel II’s Market Discipline Pillar
Summary: Market Discipline and the Banking Industry
9 Regulation and the Structure of the Banking Industry
Public Interest versus Public Choice Perspectives on Bank Regulation
Public Interest and the Alleged “Need” for Bank Regulation
PublicChoiceMotivations forBankRegulation
The Political Economy of Banking Supervision Conducted by Multiple Regulators: Is a
“Race to the Bottom” navoidable?
Regulatory Preferences and Bank Closure Policies
Competition among Bank Regulators
Should Bank Regulation Be in the Hands of Monetary Policymakers?
The Supervisory Review Process Pillar of Basel II
The Supervisory Review Process Pillar: Conceptual Issues
When Is International Coordination of Bank Regulation Appropriate?
Is There Really a Basel II Supervisory Review Process?
Regulatory Compliance Costs and Industry Structure
Assessing Banks’ Costs of Basel II Compliance: Economies ofRegulation?
Bank Regulation and Endogenous Fixed Costs
Summary: Regulation and Bank Industry Structure .
References
Index
268 pages, Hardcover
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