Bank Size and Risk-Taking under Basel II

Hakenes, Hendrik and Schnabel, Isabel (February 2006): Bank Size and Risk-Taking under Basel II. SFB/TR 15 Discussion Paper No. 88

Abstract

We analyze the relationship between bank size and risk-taking under the New Basel Capital Accord. Using a model with imperfect competition and moral hazard, we show that the introduction of an internal ratings based (IRB) approach improves upon flat capital requirements if the approach is applied uniformly across banks and if the costs of implementation are not too high. However, the banks’ right to choose between the standardized and the IRB approaches under Basel II gives larger banks a competitive advantage and, due to fiercer competition, pushes smaller banks to take higher risks. This may even lead to higher aggregate risk-taking.

• Item Type: Paper (Discussion Paper)
• Keywords: Basel II, IRB approach, bank competition, capital requirements, SME financing
• Collections: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > B3 - Unternehmenskontrolle, Unternehmensfinanzierung und Effizienz
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: G21, G28, L11
• Language: English