The cross-border effects of bank capital regulation

Saleem Bahaj and Frederic Malherbe

Journal of Financial Economics, 2024, vol. 160, issue C

Abstract: We study the international coordination of bank capital requirements under a host-country rule: the requirement depends on where the borrower, not the bank, is located. In such a regime, countries compete for scarce bank equity capital. Raising a country’s requirement may generate bank capital outflows as well as inflows. We pin down the condition for the sign of the capital flow and the associated externality, and highlight the policy implications. Absent collaboration, overshooting is likely: individual countries have an incentive to increase Basel III’s Counter-Cyclical Capital Buffer too much in good times and cut it too much in bad times.

Keywords: CCyB; International coordination; Race to the bottom; Race to the top; Liquidity services (search for similar items in EconPapers)
JEL-codes: G15 G21 G28 (search for similar items in EconPapers)
Date: 2024
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Working Paper: The Cross-border Effects of Bank Capital Regulation (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:160:y:2024:i:c:s0304405x24001351

DOI: 10.1016/j.jfineco.2024.103912

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