How banking regulation affects collusion sustainability: A multimarket contact approach

This paper investigates how regulatory instruments affect collusion sustainability in banking within a theoretical framework where: (i) banks compete simultaneously in loan and deposit markets characterized by different degrees of product differentiation; (ii) strategic interaction occurs through an infinitely repeated game with Nash reversion strategies; and (iii) capital requirements, reserve ratios, and interbank rates alter the relative profitability of each market. We show that the impact of these instruments on collusion depends critically on relative market differentiation: the same regulatory instrument can either facilitate or hinder coordination depending on which market exhibits greater product homogeneity. This non-monotonicity implies that regulators must account for market structure when calibrating policy instruments to avoid unintended effects on competitive intensity. • Banking regulation affects collusion sustainability via multimarket contact dynamics. • Capital requirements and reserve ratios have non-monotonic effects on collusion stability. • Regulatory impact on collusion hinges on relative differentiation across loan/deposit markets. • Higher capital requirements ease or hinder collusion depending on which market is more differentiated. • Prudential and competition regulators must therefore coordinate to avoid unintended anticompetitive effects.