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Financial Liberalisation and Capital Regulation in Open Economies

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  • Alan D. Morrison
  • Lucy White

Abstract

We model the interaction between two economies where banks exhibit both adverse selection and moral hazard and bank regulators try to resolve these problems. We find that liberalising bank capital flows between economies reduces total welfare by reducing the average size and efficiency of the banking sector. This effect can be countered by forcing international harmonisation of capital requirements across economies, a policy reminiscent of the "level playing field" adopted in the 1988 Basle Accord. Such a policy is good for weaker regulators whereas a laissez faire policy under which each country chooses its own capital requirement is better for the higher quality regulator. We find that imposing a level playing field among countries is globally optimal provided regulators’ abilities are not too different. We also show how shocks will be transmitted differently across the two policy regimes.

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Bibliographic Info

Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2004fe10.

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Date of creation: 2004
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Handle: RePEc:sbs:wpsefe:2004fe10

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Web page: http://www.finance.ox.ac.uk
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Cited by:
  1. Xavier Freixas & Sjaak Hurkens & Alan D. Morrison & Nir Vulkan, 2007. "Interbank Competition with Costly Screening," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 15.
  2. Casamatta, Catherine & Haritchabalet, Carole, 2007. "Experience, screening and syndication in venture capital investments," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 368-398, July.
  3. Vo, Xuan Vinh & Daly, Kevin James, 2007. "The determinants of international financial integration," Global Finance Journal, Elsevier, vol. 18(2), pages 228-250.
  4. Hakenes, Hendrik & Schnabel, Isabel, 2006. "The Threat of Capital Drain: A Rationale for Public Banks?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 107, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  5. Josh Lerner & Jean Tirole, 2004. "A Model of Forum Shopping, with Special Reference to Standard Setting Organizations," NBER Working Papers 10664, National Bureau of Economic Research, Inc.

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