Bank competition and capital allocation

• Main Author: Eggenberger, Knut
• Published: London School of Economics and Political Science (University of London) 2006
• Subjects: 332.1068
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.645616

This thesis consists of eight chapters investigating the relationship between bank competition and capital allocation. Following the introduction (chapter 1), the second chapter provides a review of the literature. The third chapter extends a seminal contribution in the bank competition literature, the model developed by Broecker (1990). In chapter 4 I show that an auction framework may be an inappropriate way of modeling bank competition and I explore the implications of modeling bank competition in a more robust fashion for the allocation of capital. The fifth chapter aims to resolve a long-standing discrepancy between the empirical and theoretical literatures on bank competition and capital allocation. While theoretical work tends to see few benefits from more intense competition, the evidence suggests that the allocation of capital improves as bank competition becomes more intense. The theoretical model developed in chapter 5 reconciles these results by modeling banks' objective function in a way consistent with empirical evidence on X-inefficiency in banks. Chapters 6 and 7 investigate the transmission mechanism through which a greater intensity of competition is transmitted within banks and study lending-related incentive structures through interview-based fieldwork. Chapter 6 provides motivation and outlines the scope of the study whereas the actual findings are presented in chapter 7. That chapter also analyzes the implications for the lending and monitoring decisions that co-determine the allocation of capital. Chapter 8 concludes.