International Prudential Regulation, Regulatory Risk and the Cost of Bank Capital
AbstractWe define regulatory risk as any regulatory action that leads to an increase in the cost of capital for the regulated firm. In a general equilibrium setting the paper considers the impact of globally harmonising capital adequacy requirements on the cost of bank equity capital. The results show that uniform increases in capital requirements lead to an increase in the cost of capital. However when regulatory standards differ across countries, financial integration leads to positive spillovers which reduces the cost of capital mark up for a given increase in bank capital. Accordingly, regulatory risk may be greater under a regulatory agreement such as the Basel Accord which imposes international uniformity in capital ratios.
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Bibliographic InfoPaper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2006-463.
Length: 36 pages
Date of creation: May 2006
Date of revision:
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