Working Paper: CEPR ID: DP12791
Authors: Hans Gersbach; Hans Haller; Stylianos Papageorgiou
Abstract: We study competition between governments with regard to capital requirements, bank levies and resolution regimes in a general equilibrium setting. In a two-country model, households can invest both domestically and abroad, with banks acting as intermediaries between households and risky technologies. When competing governments set banking regulation, the mechanism at work is driven by the trade-off between accentuating benefits over costs stemming from banking activities, on the one hand, and enhancing banks' competitiveness, on the other hand. Whether or not regulatory competition yields the efficient allocation of resources and risks crucially depends on whether governments compete with one, two or three policy tools.
Keywords: regulatory competition; general equilibrium; capital requirements; bank levy; bank resolution
JEL Codes: D53; E44; G21; G28; H73
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulatory competition over capital requirements (G18) | Suboptimal allocation of resources (D61) |
| Fixed bank levies and resolution regimes (G28) | Bailout costs exceeding revenues from levies (H69) |
| Regulatory competition with flexibility in policy tools (L59) | Efficient allocation of resources (D61) |
| Interaction of capital requirements, bank levies, and resolution regimes (G28) | Balanced outcome of benefits and risks in banking activities (G21) |
| Dynamics of equity issuance costs (G12) | Efficiency of regulatory competition (K20) |