Dynamical analysis of a banking duopoly model with capital regulation and asymmetric costs

Abstract

<p style='text-indent:20px;'>It is well known that regulation and efficiency are two important issues on banking literature. The goal of the paper is to analyse them through a banking duopoly model with heterogeneous expectations. To this purpose, we consider two scenarios. In the first one, we focus on regulation effects. In particular, empirical literature on Italian banks finds evidence on the asymmetry of the costs of regulation that penalize small banks with respect to the large ones. In this direction, we analyse a duopoly model where small banks and large banks have different forecasting rules and we capture the differences of the regulations' effects assuming asymmetry in the cost functions. We introduce linear cost function for small banks and quadratic cost function for large banks. In the second scenario, we study the relation between regulation and bank efficiency highlighting empirical results showing that large banks register higher level of inefficiency than small banks. Moreover, in order to stress new evidences and to confirm empirical results on banking regulation and efficiency, we conduct an analytical and numerical analysis.</p>