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Regulatory competition in capital standards: a ‘race to the top’ result

Andreas Haufler () and Ulf Maier

Journal of Banking & Finance, 2019, vol. 106, issue C, 180-194

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’ results, 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: G28 F36 H73 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jbankfin.2019.06.001

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Handle: RePEc:eee:jbfina:v:106:y:2019:i:c:p:180-194