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Title:The regulator's trade-off: Bank supervision vs. minimum capital PDF Logo
Authors:Buck, Florian
Schliephake, Eva
Issue Date:2012
Series/Report no.:CESifo Working Paper: Monetary Policy and International Finance 3923
Abstract:We develop a simple model of banking regulation with two policy instruments: minimum capital requirements and supervision of domestic banks. The regulator faces a trade-off: high capital requirements cause a drop in the banks'; profitability, while strict supervision reduces the scope of intermediation and is costly for taxpayers. We show that the expected costs of a banking crisis are minimised with a mix of both instruments. Once we allow for cross-border banking, the optimal policy is not feasible. If domestic supervisory effort is not observable, our model predicts a race to the bottom in banking regulation. Therefore, countries are better off by harmonising regulation on an international standard.
Subjects:bank regulation
regulatory competition
supervision and capital requirements
JEL:F36
G18
K23
L51
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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