Regulatory competition in capital standards with selection effects among banks

Haufler, Andreas and Maier, Ulf (March 2016): Regulatory competition in capital standards with selection effects among banks. Discussion Papers in Economics 2016-5

Abstract

Several countries have recently introduced national capital standards exceeding the internationally coordinated Basel III rules, thus suggesting a `race to the top' in capital standards. We study regulatory competition when banks are heterogeneous and give loans to firms that produce output in an integrated market. In this setting capital requirements change the pool quality of banks in each country and inflict negative externalities on neighboring jurisdictions by shifting risks to foreign taxpayers and by reducing total credit supply and output. Non-cooperatively set capital standards are higher than coordinated ones when governments care equally about bank profits, taxpayers, and consumers.

• Item Type: Paper
• Keywords: regulatory competition, capital requirements, bank heterogeneity
• Faculties: Economics; Economics > Munich Discussion Papers in Economics
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: G28, F36, H73
• Language: English

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