Failure of capital requirements regulation in the banking industry: evidence from a bank-based financial system

Abstract

This article studies the impact of Basel I and Basel II regulation in a bank-based financial system on the degree of competition in the banking sector, as measured via the Panzar and Rosse statistic. Strikingly, our results suggest that, contrary to the regulator’s expectation, stability-oriented regulation reduces competition in the banking sector. Further analysis suggests that while Basel does not have a significant impact on the large banks, it reduces competition among other banks, which move towards uncompetitive dynamics. This shift towards monopoly is aligned with the hypothesis of this regulation to create competitive advantages for large banks at the expense of the others.