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Bank Capital Regulation with Asymmetric Countries

  • Damien S.Eldridge

    ()

    (School Economics, La Trobe University)

  • Heajin H.Ryoo

    ()

    (School of Economics, La Trobe University)

  • Axel Wieneke

    ()

    (School of Economics, La Trobe University)

Financial markets are increasingly globalized, so that the impacts of na- tional banking regulations extend beyond national borders. Strict regulation reduces global loan supply and thus widens interest rate spreads. This is an externality insofar as it affects foreign banks profitability and stability. The sovereigns' motivation to join an internationally coordinated regulatory regime, such as the Basel Accords, has been discussed in the literature. How- ever, regulatory enforcement remains a domestic responsibility. In combina- tion with asymmetric information, this gives national authorities room to deviate in the form of lax regulation. We show that each regulator's en- forcement choice is affected by the relative country size. Lax enforcement improves the profitability of home banks, but diminishes the global interest rate spreads. An authority regulating a small market has only a small effect on global interest rates. As such, it may choose lax regulation to improve domestic bank profitability without significantly diminishing global spreads. In contrast, an authority regulating a large market will have a significant im- pact on global spreads. Therefore, small country regulators have a stronger incentive to deviate from strict international regulatory standards.

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File URL: http://www.latrobe.edu.au/__data/assets/pdf_file/0020/221078/2012.08.pdf
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File URL: http://www.latrobe.edu.au/__data/assets/pdf_file/0020/221078/2012.08.pdf
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Paper provided by School of Economics, La Trobe University in its series Working Papers with number 2012.08.

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Length: 48 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:trb:wpaper:2012.08
Note: ISSN-1837-2198
Contact details of provider: Web page: http://www.latrobe.edu.au/economics

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  1. Viral V. Acharya, 2003. "Is the International Convergence of Capital Adequacy Regulation Desirable?," Journal of Finance, American Finance Association, vol. 58(6), pages 2745-2782, December.
  2. Sinn, Hans-Werner, 2003. "Risktaking, Limited Liability, and the Competition of Bank Regulators," Munich Reprints in Economics 19615, University of Munich, Department of Economics.
  3. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
  4. 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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