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Regulatory Competition and Bank Risk Taking

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Author Info
Itai Agur

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

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jean-Jacques Laffont & David Martimort, 1999. "Separation of Regulators Against Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 232-262, Summer. [Downloadable!] (restricted)
    Other versions:
  2. Rochet, Jean-Charles & Vives, Xavier, 2004. "Coordination Failures and the Lender of Last Resort : Was Bagehot Right After All?," IDEI Working Papers 294, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  3. Xavier Freixas, 2005. "Interbank Market Integration under Asymmetric Information," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 18(2), pages 459-490. [Downloadable!] (restricted)
  4. Jean-Charles Rochet & Jean Tirole, 1996. "Interbank lending and systemic risk," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 733-765.
    Other versions:
  5. X. Freixas & B. Parigi & J-C. Rochet, 2000. "Systemic Risk, Interbank Relations and Liquidity Provision by theCentral Bank," DNB Staff Reports (discontinued) 47, Netherlands Central Bank. [Downloadable!]
    Other versions:
  6. Rosen, Richard J, 2003. " Is Three a Crowd? Competition among Regulators in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 967-98, December.
  7. Bhattacharya, Sudipto & Boot, Arnoud W A & Thakor, Anjan V, 1998. "The Economics of Bank Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 745-70, November.
    Other versions:
  8. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    Other versions:
  9. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
  10. Freixas, Xavier & Loranth, Gyongyi & Morrison, Alan D., 2007. "Regulating financial conglomerates," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 479-514, October. [Downloadable!] (restricted)
  11. Dell'Ariccia, Giovanni & Marquez, Robert, 2006. "Competition among regulators and credit market integration," Journal of Financial Economics, Elsevier, vol. 79(2), pages 401-430, February. [Downloadable!] (restricted)
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