The dynamics of a banking duopoly with capital regulations

Luciano Fanti

Discussion Papers from Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy

Abstract: We analyse the dynamics of a banking duopoly game with heterogeneous players (as regards the type of expectations' formation), to investigate the effects of the capital requirements introduced by international accords (Basel-I in 1988 and more recently Basel-II and Basel-III), in the context of the Monti-Klein model. This analysis reveals that the policy of introducing a capital requirement may stabilise the market equilibrium. Moreover, we show that when the capital standard is reduced the market stability is lost through a flip bifurcation and subsequently a cascade of flip bifurcations may lead to periodic cycles and chaos. Therefore, although on the one side the capital regulation is harmful for the equilibrium loans' volume and profit, on the other side it is effective in keeping or restoring the stability of the Cournot-Nash equilibrium in the banking duopoly.

Keywords: Bifurcation; Chaos; Cournot; Oligopoly; Banking; Capital regulation. (search for similar items in EconPapers)
JEL-codes: C62 D43 G21 G28 L13 (search for similar items in EconPapers)
Date: 2012-09-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-com and nep-ind
Note: ISSN 2039-1854
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Citations: View citations in EconPapers (1)

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Journal Article: The dynamics of a banking duopoly with capital regulations (2014)
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