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

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  • Florian Buck
  • Eva Schliephake

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.

Suggested Citation

  • Florian Buck & Eva Schliephake, 2012. "The Regulator's Trade-off: Bank Supervision vs. Minimum Capital," CESifo Working Paper Series 3923, CESifo.
    • Handle: RePEc:ces:ceswps:_3923
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    Cited by:

    1. Jochen Zimmermann & Stephan Paul & Thomas Heidorn & Christian Schmaltz & Michael Torben Menk & Lothar Jerzembek & Karen Braun-Munzinger & Korbinian Ibel, 2017. "Discussion over Basel IV: Excessive Burden on European Banks or Still Too Lax?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 70(03), pages 03-22, February.

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    More about this item

    Keywords

    bank regulation; regulatory competition; supervision and capital requirements;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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