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Bank capital regulation: Are local or central regulators better?

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  • Haritchabalet, Carole
  • Lepetit, Laetitia
  • Spinassou, Kévin
  • Strobel, Frank

Abstract

Using a simple two-region model where local or central regulators set bank capital requirements as risk sensitive capital or leverage ratios, we demonstrate the importance of capital requirements being set centrally when cross-region spillovers are large and local regulators suffer from substantial regulatory capture. We show that local regulators may want to surrender regulatory power only when spillover effects are large but the degree of supervisory capture is relatively small, and that bank capital regulation at central rather than local levels is more beneficial the larger the impact of systemic risk and the more asymmetric is regulatory capture at the local level.

Suggested Citation

  • Haritchabalet, Carole & Lepetit, Laetitia & Spinassou, Kévin & Strobel, Frank, 2017. "Bank capital regulation: Are local or central regulators better?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 49(C), pages 103-114.
  • Handle: RePEc:eee:intfin:v:49:y:2017:i:c:p:103-114
    DOI: 10.1016/j.intfin.2017.02.007
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    More about this item

    Keywords

    Bank regulation; Capital requirement; Spillover; Regulatory capture; Financial architecture;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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