Correlation between the risks of portfolios of different commercial banks leads to too much risk taking from a social planner's perspective. The presence of a regulator improves this risk-benefit allocation of the financial system. In this paper I show that first-best regulation also leads to more attention for the fundamentals of borrowing countries.
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Find related papers by JEL classification: G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure F34 - International Economics - - International Finance - - - International Lending and Debt Problems E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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