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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. (C) 2019 Elsevier B.V. All rights reserved.

Suggested Citation

  • Haufler, Andreas & Maier, Ulf, 2019. "Regulatory competition in capital standards: a 'race to the top' result," Munich Reprints in Economics 78224, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:78224
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    Cited by:

    1. Haufler, Andreas & Lülfesmann, Christoph, 2022. "Voluntary Equity, Project Risk, and Capital Requirements," Rationality and Competition Discussion Paper Series 357, CRC TRR 190 Rationality and Competition.
    2. Juan Tang & Fangming Qin, 2022. "Analyzing the impact of local government competition on green total factor productivity from the factor market distortion perspective: based on the three stage DEA model," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 24(12), pages 14298-14326, December.
    3. Bahaj, Saleem & Malherbe, Frederic, 2024. "The cross-border effects of bank capital regulation," Journal of Financial Economics, Elsevier, vol. 160(C).
    4. Soto, Gonzalo H. & Balsalobre-Lorente, Daniel & Martinez-Cobas, Xavier, 2025. "Environmental legislative shaping or green competitive advantages? The role of FDI among environmental regulations," Energy Economics, Elsevier, vol. 145(C).
    5. Müting, Miriam, 2020. "Multinational lending retrenchment after the global financial crisis: The impact of policy interventions," Discussion Papers in Economics 72612, University of Munich, Department of Economics.
    6. Haufler, Andreas, 2021. "Regulatory and bailout decisions in a banking union," Journal of Banking & Finance, Elsevier, vol. 133(C).
    7. Beck, Thorsten & Silva-Buston, Consuelo & Wagner, Wolf, 2025. "Supervisory arbitrage and real effects," Journal of Corporate Finance, Elsevier, vol. 95(C).
    8. Andreas Haufler & Ian Wooton, 2021. "Multinational banks in regulated markets: Is financial integration desirable?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(4), pages 1811-1841, November.

    More about this item

    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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