The regulator's trade-off: Bank supervision vs. minimum capital

Arbeitspapier

We develop a simple model of banking regulation with two policy instruments: minimum capital requirements and supervision of domestic banks. The regulator faces a trade-off: high capital requirements cause a drop in the banks'; profitability, while strict supervision reduces the scope of intermediation and is costly for taxpayers. We show that the expected costs of a banking crisis are minimised with a mix of both instruments. Once we allow for cross-border banking, the optimal policy is not feasible. If domestic supervisory effort is not observable, our model predicts a race to the bottom in banking regulation. Therefore, countries are better off by harmonising regulation on an international standard.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 3923

Classification and Topics

• Classification: Wirtschaft ; Financial Aspects of Economic Integration ; General Financial Markets: Government Policy and Regulation ; Regulated Industries and Administrative Law ; Economics of Regulation
• Subject: bank regulation ; regulatory competition ; supervision and capital requirements ; Bankenpolitik ; Basler Akkord ; Bankenaufsicht ; Policy-Mix ; Bankenkrise ; Institutioneller Wettbewerb ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Buck, Florian ; Schliephake, Eva
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/64847
• Last update: 10.03.2025, 11:43 AM CET