International policy coordination for financial regime stability under cross-border externalities
Sungmin Park and
Young-Han Kim ()
Journal of Banking & Finance, 2018, vol. 97, issue C, 177-188
This paper examines the conditions for effective coordination in financial regulatory policy when banks are politically influential, considering cross-border externalities arising from multinational banking operation. We demonstrate that when banks are inefficient with high loan monitoring costs, regulatory effort is a strategic substitute so that each country's regulator tends to exert lower effort free-riding that of the other countries’ regulator. On the other hand, when banks are efficient with lower monitoring costs, regulatory effort is a strategic complement and regulators have lower incentives to free-ride. However, regulators face multiple equilibria and thus financial instability if each of them responds in an overly sensitive manner to another's strategy. In this case, introducing informational barriers can refine multiple equilibria into a unique equilibrium. The results suggest that cooperative financial policy coordination mechanism is more likely to be sustained among countries whose banking sectors’ political influence on regulators is smaller and more homogeneous.
Keywords: Strategic complementarity and substitutability of financial regulatory policies; International policy coordination; Cross-border externality; Capital adequacy requirements; Financial stability (search for similar items in EconPapers)
JEL-codes: F55 F42 E61 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:97:y:2018:i:c:p:177-188
Access Statistics for this article
Journal of Banking & Finance is currently edited by Ike Mathur
More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().