Level Playing Fields in International Financial Regulation
Description
Joint work with Alan Morrison, Saïd Business School, Oxford.
We study a model of featuring two economies with adverse selection of and moral hazard by bankers. We demonstrate that in such a set-up, removing barriers to capital flow between economies may reduce total welfare by harming the average efficiency of the banking sector. With international capital mobility, bankers who fail to obtain a charter in the economy with the better regulator will be able to turn to the lower quality regulators for a licence, so worsening the pool of banks in the already poorly regulated economy. This effect can be countered by setting level capital requirements across economies, which penalises bankers operating under the higher quality regulator, or it can be ignored, which penalises bankers under the lower quality regulator. We determine the circumstances under which each policy is preferred and comment upon the optimality of an international 'level playing field' for capital requirements.
Keywords: Bank regulation, capital, multinational banks, exchange controls, international financial regulation, level playing field.
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