This paper presents a dynamic model of imperfect competition in banking where banks can invest in either a prudent or a gambling asset. It shows that when intermediation margins are small, banks have a gambling equilibrium, and capital requirements can ensure a prudent equilibrium by reducing gambling incentives. Deposit rate ceilings may increase franchise values but do not always ensure a prudent equilibrium. The paper analyzes the effects of capital requirements, deposit rate ceilings, and risk-based capital requirements on bank behavior. It finds that risk-based capital requirements are more efficient in ensuring a prudent equilibrium. The paper also shows that deposit rate ceilings can ensure a prudent equilibrium for a larger set of parameter values, but may not always work if the success return of the gambling asset or the cost of capital are sufficiently high. The paper concludes that capital requirements are effective in reducing risk-taking incentives, while deposit rate ceilings may not always work. The paper also discusses the implications of these findings for bank regulation.This paper presents a dynamic model of imperfect competition in banking where banks can invest in either a prudent or a gambling asset. It shows that when intermediation margins are small, banks have a gambling equilibrium, and capital requirements can ensure a prudent equilibrium by reducing gambling incentives. Deposit rate ceilings may increase franchise values but do not always ensure a prudent equilibrium. The paper analyzes the effects of capital requirements, deposit rate ceilings, and risk-based capital requirements on bank behavior. It finds that risk-based capital requirements are more efficient in ensuring a prudent equilibrium. The paper also shows that deposit rate ceilings can ensure a prudent equilibrium for a larger set of parameter values, but may not always work if the success return of the gambling asset or the cost of capital are sufficiently high. The paper concludes that capital requirements are effective in reducing risk-taking incentives, while deposit rate ceilings may not always work. The paper also discusses the implications of these findings for bank regulation.