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Liberalization, Prudential Supervision, and Capital Requirements

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  • Elina Ribakova

Abstract

While deregulated financial markets and strong competition are commonly viewed as prerequisites for successful economic development, recent empirical evidence suggests that financial liberalization, if not well phased, can lead to costly financial crises. This paper focuses on the roles of minimum capital requirements and prudential supervision in promoting financial stability during financial liberalization. The paper extends the Hellmann, Murdock, and Stiglitz model to analyze the effects of prudential supervision and demonstrates the trade-off between the quality of supervision and the level of minimum capital requirements. Where prudential supervision is poor, higher capital requirements are optimal.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/136.

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Length: 14
Date of creation: 01 Jul 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/136

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Related research

Keywords: Moral hazard; Bank supervision; Financial systems; Financial stability; Economic models; financial liberalization; financial markets; prudential regulation; financial fragility; prudential regulation and supervision; financial regulation; international finance; political interference; banking crises; financial system; prudential supervision; deposit rate; financial crises; financial institutions; bank regulation; financial reforms; financial market; economic crisis; financial repression; financial instruments; banking supervision; deposit rates; recapitalization; banking crisis; capital account liberalization; financial economics; financial crisis; financial intermediation;

This paper has been announced in the following NEP Reports:

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  1. Robert Dekle & Kenneth M. Kletzer, 2001. "Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia," NBER Working Papers 8322, National Bureau of Economic Research, Inc.
  2. M. Brownbridge & C. Kirkpatrick, 2000. "Financial Regulation in Developing Countries," Journal of Development Studies, Taylor & Francis Journals, vol. 37(1), pages 1-24.
  3. Beck, Thorsten & Levine, Ross & Loayza, Norman, 1999. "Finance and the sources of growth," Policy Research Working Paper Series 2057, The World Bank.
  4. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  5. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
  6. Kenneth Kletzer & Robert Dekle, 2001. "Domestic Bank Regulation and Financial Crises," IMF Working Papers 01/63, International Monetary Fund.
  7. Caprio, Gerard, Jr. & Honohan, Patrick, 1999. "Beyond capital ideals : restoring banking stability," Policy Research Working Paper Series 2235, The World Bank.
  8. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  9. João A. C. Santos, 2000. "Bank capital regulation in contemporary banking theory: a review of the literature," BIS Working Papers 90, Bank for International Settlements.
  10. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  11. Fry, Maxwell J, 1997. "In Favour of Financial Liberalisation," Economic Journal, Royal Economic Society, vol. 107(442), pages 754-70, May.
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