The regulator’s trade-off: Bank supervision vs. minimum capital

Florian Buck and Eva Schliephake

Journal of Banking & Finance, 2013, vol. 37, issue 11, 4584-4598

Abstract: We develop a simple model of banking regulation with two policy instruments: minimum capital requirements and the supervision of domestic banks. The regulator faces a trade-off: high capital requirements cause a drop in the banks’ profitability, whereas strict supervision reduces the scope of intermediation and is costly for taxpayers. We show that a mix of both instruments minimises the costs of preventing the collapse of financial intermediation. 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 capital requirement regulation. Therefore, countries are better off by harmonising regulation on an international standard.

Keywords: Bank regulation; Regulatory competition; Banking supervision (search for similar items in EconPapers)
JEL-codes: F53 G21 G28 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:11:p:4584-4598

DOI: 10.1016/j.jbankfin.2013.04.012

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