Abstract
We investigate the welfare implications of endogenizing bank regulation and supervision quality in a dynamic general equilibrium framework. Bank regulation and supervision quality (alpha) affects households through deposit decision, firms through credit pay-back decision, and banks via a fee paid for non-performing loans. Two alternative institutional mechanisms are considered for endogenizing alpha: (i) a regulatory and supervisory agent (BRS) that maximizes lifetime banking sector profitability; (ii) a macroprudential agent (MP) that minimizes lifetime non-performing loans. Under conventional functional form and competitive banking structure assumptions, the BRS scenario welfare-dominates the MP scenario -- although the comparable range of equilibrium solutions corresponds only to a very limited range of high non-performing loan (NPL) ratios where the BRS scenario produces a feasible solution set. In the case of monopolistic banking sector, there is no common range of NPL ratios for which both scenarios are feasible. Under both competitive and monopolistic banking sector assumptions, equilibrium under the MP scenario is obtained for a large range and empirically observable low rates of NPL, associated with much higher welfare levels than the BRS scenario.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
