This paper presents a dynamic model of imperfect competition in banking where the banks can invest in a prudent or a gambling asset. We show that if intermediation margins are small, the bank's franchise values will be small, and in the absence of regulation only a gambling equilibrium will exist. In this case, capital requirements can ensure the existence of a prudent equilibrium, because they do not affect the banks' franchise values and reduce their gambling incentives by putting equity at risk. In contrast, deposit interest rate ceilings may increase the banks' franchise value, but do not always guarantee the existence of a prudent equilibrium.