Modeling the economic effects of banking sector regulation and supervision

In this thesis, the effect of bank regulation and supervision on economic growth is analyzed theoretically. By means of OLG model framework, optimization problems of three types of agents have been constructed: consumer’s utility maximization problem, producer’s and bank’s profit maximization problems. Two types of settings have been evaluated separately in order to figure out the monitoring decisions of the bank: homogenous producers and non-homogenous producers. Regulation and supervision level of the banking sector is represented by an index, which is denoted by α in the model and it affects the optimization behavior of each agent: it increases the amount of deposits transferred to banks by consumers; it enhances the amount of credit that is converted into capital, and it affects behaviors of the bank in terms of monitoring producers. Calibration analysis is performed and it is found that no monitoring is more preferable for the bank as compared to monitoring and variable cost monitoring is more preferable than fixed cost monitoring. In addition, comparative static analysis yield that higher bank regulation and supervision improves per capita output, wages and credit and reduces interest rates and producers with higher credit conversion capabilities have higher per capita output; they pay higher wages; they demand more credit and pay less interest rate.