The Regulator's Trade-off: Bank Supervision vs. Minimum Capital

Florian Buck and Eva Schliephake ()

No 3923, CESifo Working Paper Series from CESifo

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

Keywords: bank regulation; regulatory competition; supervision and capital requirements (search for similar items in EconPapers)
JEL-codes: F36 G18 K23 L51 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban and nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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