International Financial Regulation: The Role of Banking Sector Sizes

Johannes Matschke

No RWP 21-13, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper presents a simple N region banking model of liquidity mismatch to study the strategic interactions between national regulators. Banks hold insufficient liquidity, which leads to a fire-sale externality in an international financial market, justifying coordinated prudential regulation. However, countries with a smaller banking sector internalize less of the inefficiency and have an incentive to free-ride on foreign regulation. As a consequence, countries cannot agree on common regulatory standards. Further, small countries have a strictly positive marginal cost to regulate, which can also prevent coordination on non-harmonized standards. An empirical section demonstrates that key issues around the implementation of the Basel Agreements are consistent with the implications from the model.

Keywords: International liquidity regulation; Capital controls; Welfare (search for similar items in EconPapers)
JEL-codes: D62 F36 F42 G15 G21 (search for similar items in EconPapers)
Pages: 81
Date: 2021-11-17, Revised 2024-07-10
New Economics Papers: this item is included in nep-fdg
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:93597

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DOI: 10.18651/RWP2021-13

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