Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/64847
Authors: 
Buck, Florian
Schliephake, Eva
Year of Publication: 
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

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