Banking regulation and competition with product differentiation
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Journal of Development Economics (e-ISSN: 1872-6089)
Abstract
The main motivation for prudential regulation is to increase the solvency of the banking
sector. However, it is usually understood that tighter regulation also leads to more
concentration and higher spreads. Thus, these prudential measures are seen as implying a
trade-off between solvency and competition. In this paper we argue that this trade-off does
not necessarily exist. We present a model in which tighter capital requirements lead banks
to choose a lower degree of product differentiation, potentially inducing more intense
competition and lower spreads. The model is motivated by the recent evolution of the
Argentine banking sector.
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Keywords
Actividad bancaria y financiera, Banking and financial activity, Competencia, Competition