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Regulatory competition in credit markets with capital standards as signals

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  • Maier, Ulf
  • Haufler, Andreas

Abstract

This paper studies regulatory competition in the banking sector in a model where banks are heterogeneous and taxpayers come up for the losses of failing banks. Capital requirements force the weakest banks to exit the market. This gives rise to a signalling effect of capital standards, as borrowing firms anticipate the higher average quality of banks in a more strictly regulated country. In this model, regulatory competition in capital standards may lead to a `race to the top' for two different reasons. First, if the signalling effect is sufficiently strong, the overall demand for loans from the high-quality banks of the regulating country rises, even though the number of active banks in this country is reduced. Second, if governments are heavily concerned about the tax revenue losses arising from bank failures, strict capital requirements are imposed to improve the pool quality of the domestic banking sector and reduce the risk to taxpayers. --

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79769.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79769

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  1. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  2. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  3. Friederike Niepmann & Tim Schmidt-Eisenlohr, 2011. "Bank Bailouts, International Linkages and Cooperation," CESifo Working Paper Series 3384, CESifo Group Munich.
  4. Anat R. Admati & Peter M. DeMarzo & Martin F. Hellwig & Paul Pfleiderer, 2010. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2010_42, Max Planck Institute for Research on Collective Goods.
  5. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
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  7. Hans-Werner Sinn, 2001. "Risk Taking, Limited Liability and the Competition of Bank Regulators," CESifo Working Paper Series 603, CESifo Group Munich.
  8. Sinn, Hans-Werner, 1997. "The selection principle and market failure in systems competition," Munich Reprints in Economics 19854, University of Munich, Department of Economics.
  9. Kopecky, Kenneth J. & VanHoose, David, 2006. "Capital regulation, heterogeneous monitoring costs, and aggregate loan quality," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2235-2255, August.
  10. Alan D. Morrison & Lucy White, 2005. "Crises and Capital Requirements in Banking," American Economic Review, American Economic Association, vol. 95(5), pages 1548-1572, December.
  11. Repullo, Rafael, 2003. "Capital Requirements, Market Power and Risk-Taking in Banking," CEPR Discussion Papers 3721, C.E.P.R. Discussion Papers.
  12. Acharya, Viral V, 2002. "Is the International Convergence of Capital Adequacy Regulation Desirable?," CEPR Discussion Papers 3253, C.E.P.R. Discussion Papers.
  13. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June.
  14. Lucy White & Alan D. Morrison, 2002. "Crises and Capital Requirements in Banking," OFRC Working Papers Series 2002fe05, Oxford Financial Research Centre.
  15. Boot, Arnoud W A & Thakor, Anjan, 1997. "Can Relationship Banking Survive Competition?," CEPR Discussion Papers 1592, C.E.P.R. Discussion Papers.
  16. 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.
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