In a dynamic framework, commercial banks compete for customers by setting acceptance criteria for granting loans, while taking into account regulatory requirements. By easing its acceptance criteria a bank faces a trade-off between attracting more demand for loans, thus making higher per-period profits, and deterioration in the quality of its loan portfolio, thus tolerating a higher risk of failure. Our main results state that more stringent capital adequacy requirements lead banks to set stricter acceptance criteria, and that increased competition in the banking industry leads to riskier bank behaviour. It is shown that risk-adjusted regulation is effective. In an extension of our basic model, we show that it may be beneficial for a bank to hold more equity than prescribed by the regulator, even though issuing equity is more expensive than attracting deposits.

No abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.Interest rate pass-through from policy interest rates to market rates and inflation has been hypothesized to play a lesser role in Romania than in other Central European transition economies. This paper tests this hypothesis and concludes that it cannot be supported by the data. Hence pass-through in Romania is concluded to be in line with that in comparable economies in the region. Moreover, the interest rate pass-through has become more pronounced over time.JEL Classification Numbers: E50, E52, E43, P24

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper assesses changes in synchronization of real activity and financial market integration in Western Europe and evaluates their implications for financial stability. We find increased synchronization of real activity since the early 1980s and increased equity markets integration since the early 1990s. We also find that measures of systemic risk at large European financial institutions have not declined during the period 1990-2004 and that bank systemic risk profiles have converged. At the same time, the sensitivity of bank and insurance systemic risk measures to common real and financial shocks has increased in most countries. Overall, these results suggest that the integration process does not necessarily entail an unambiguously positive effect on financial stability.

No abstract