In recent years, a strong tendency towards international harmonisation of banking regulation can be observed. In this paper, we investigate some of the problems involved in the corresponding strategic interaction between countries. Technically, we show that in a game-theoretic setting with two countries and a sequential time structure, typical regulatory games involve both a cooperative equilibrium which represents international cooperation in regulatory projects and a non-cooperative equilibrium which rationalizes the late withdrawal or non-cooperation of large countries. We interpret this constellation as being representative of what has happened in the context of capital adequacy regulation (Basel II) or anti-money-laundering legislation. We conclude with a discussion of possible solutions of changing the decision mechanisms of supranational regulatory bodies.
Banking Regulation Harmonisation Reputation Basel II