Regulatory Competition In Capital Standards with Selection Effects among Banks

Ulf Maier
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Ulf Maier: LMU Munich

No 7, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: Several countries have recently introduced national capital standards exceeding the internationally coordinated Basel III rules, which is inconsistent with the \'race to the bottom\' in capital standards found in the literature. 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 and a \'race to the top\' occurs when governments care equally about bank profits, taxpayers, and consumers.

Keywords: Regulatory competition; capital requirements; bank heterogeneity (search for similar items in EconPapers)
JEL-codes: F36 G28 H73 (search for similar items in EconPapers)
Date: 2017-03-25
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
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