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Regulatory competition in capital standards: a ‘race to the top’ result

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  • Haufler, Andreas
  • Maier, Ulf

Abstract

Several countries have recently introduced national capital standards exceeding the internationally coordinated Basel III rules, which is inconsistent with the ‘race to the bottom’ in capital standards found in the literature. We study regulatory competition when banks are heterogeneous and give loans to firms that produce output in an integrated market. In this setting capital requirements change the pool quality of banks in each country and inflict negative externalities on neighboring jurisdictions by shifting risks to foreign taxpayers and by reducing total credit supply and output. Non-cooperatively set capital standards are higher than coordinated ones, and a ‘race to the top’ results, when governments care equally about bank profits, taxpayers, and consumers.

Suggested Citation

  • Haufler, Andreas & Maier, Ulf, 2019. "Regulatory competition in capital standards: a ‘race to the top’ result," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 180-194.
  • Handle: RePEc:eee:jbfina:v:106:y:2019:i:c:p:180-194
    DOI: 10.1016/j.jbankfin.2019.06.001
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    More about this item

    Keywords

    Regulatory competition; Capital requirements; Bank heterogeneity;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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