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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. Lucy White & Alan D. Morrison, 2002. "Crises and Capital Requirements in Banking," OFRC Working Papers Series, Oxford Financial Research Centre 2002fe05, Oxford Financial Research Centre.
  2. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  3. Dell'Ariccia, Giovanni & Marquez, Robert, 2006. "Competition among regulators and credit market integration," Journal of Financial Economics, Elsevier, Elsevier, vol. 79(2), pages 401-430, February.
  4. Alan D. Morrison & Lucy White, 2005. "Crises and Capital Requirements in Banking," American Economic Review, American Economic Association, American Economic Association, vol. 95(5), pages 1548-1572, December.
  5. 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, Max Planck Institute for Research on Collective Goods 2010_42, Max Planck Institute for Research on Collective Goods.
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  7. Sinn, Hans-Werner, 2003. "Risktaking, Limited Liability, and the Competition of Bank Regulators," Munich Reprints in Economics, University of Munich, Department of Economics 19615, University of Munich, Department of Economics.
  8. Acharya, Viral V, 2002. "Is the International Convergence of Capital Adequacy Regulation Desirable?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3253, C.E.P.R. Discussion Papers.
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  11. Kopecky, Kenneth J. & VanHoose, David, 2006. "Capital regulation, heterogeneous monitoring costs, and aggregate loan quality," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(8), pages 2235-2255, August.
  12. Sinn, Hans-Werner, 1997. "The selection principle and market failure in systems competition," Munich Reprints in Economics, University of Munich, Department of Economics 19854, University of Munich, Department of Economics.
  13. Friederike Niepmann & Tim Schmidt-Eisenlohr, 2010. "Bank Bail-Outs, International Linkages and Cooperation," Economics Working Papers, European University Institute ECO2010/05, European University Institute.
  14. Arnoud W. A. Boot & Anjan V. Thakor, 2000. "Can Relationship Banking Survive Competition?," Journal of Finance, American Finance Association, American Finance Association, vol. 55(2), pages 679-713, 04.
  15. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
  16. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, Elsevier, vol. 36(5), pages 1137-1170, June.
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