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The Basel Committee plans to differentiate risk-adjusted capital requirements between banks regulated under the internal ratings based (IRB) approach and banks under the standard approach. We investigate the consequences for the lending capacity and the failure risk of banks in a model with endogenous interest rates. The optimal regulatory response depends on the banks' inclination to increase their portfolio risk. If IRB-banks are well-capitalized or gain little from taking risks, then they will increase their market share and hold safe portfolios. As risk-taking incentives become more important, the optimal portfolio size of banks adopting intern rating systems will be increasingly constrained, and ultimately they may lose market share relative to banks using the standard approach. The regulator has only limited options to avoid the excessive adoption of internal rating systems. JEL Klassifikation: K13, H41.
This paper examines the effect of imperfect labor market competition on the efficiency of compensation schemes in a setting with moral hazard, private information and risk-averse agents. Two vertically differentiated firrms compete for agents by offering contracts with fixed and variable payments. Vertical differentiation between firms leads to endogenous, type-dependent exit options for agents. In contrast to screening models with perfect competition, we find that existence of equilibria does not depend on whether the least-cost separating allocation is interim efficient. Rather, vertical differentiation allows the inferior firm to offer (cross-)subsidizing fixed payments even above the interim efficient level. We further show that the efficiency of variable pay depends on the degree of competition for agents: For small degrees of competition, low-ability agents are under-incentivized and exert too little effort. For large degrees of competition, high-ability agents are over-incentivized and bear too much risk. For intermediate degrees of competition, however, contracts are second-best despite private information.