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Regulatory Competition and Bank Risk Taking

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  • Itai Agur

Abstract

How damaging is competition between bank regulators? This paper develops a model in which both banks' risk profile and their access to wholesale funding are endogenous. Regulators weigh not only welfare, but also the number of banks under their supervision. Simulations indicate that the gains from consolidating US regulation are moderate, roughly 0.5-1% of GDP. But retaining multiple regulators implies a choice for a financial system that is both more profitable and more fragile. The paper also shows how complex balance sheet items give rise to a gradual rise in bank risk, followed by a sudden interbank crisis.�Â

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 213.

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Date of creation: Jul 2009
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Handle: RePEc:dnb:dnbwpp:213

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Keywords: regulatory competition; arbitrage; bank risk; liquidity risk; interbank market.;

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