Competition Among Regulators
International Monetary Fund, May 1, 2001 - Business & Economics - 24 pages
This paper shows that competition among regulators reduces regulatory standards relative to a centralized solution. It suggests that a central regulator is more likely to emerge for homogeneous and financially integrated countries. The paper proves these results in a model where regulators concerned with their banking system’s stability and efficiency and with their banks’ profitability set their regulatory policy non-cooperatively. Externalities in bank regulation make the independent solution collectively inefficient. These externalities and the benefits of centralized regulation increase with financial integration, while the costs associated with the loss of independence decrease with the homogeneity of the countries involved.
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analysis assume assumption asymmetric countries bank proﬁts bank regulation banks chartered beneﬁcial beneﬁt of coordinating beneﬁt to regulator capital adequacy ratio capital requirements carmot centralized regulator centralized solution choose to form competition among regulators conﬁrms context costs country’s banks cross-border activities decreasing Deﬁne deﬁnition degree of ﬁnancial degrees of regulatory depositors diﬁer domestic banking system domestic regulators envelope theorem equation equilibrium example expression is negative extemalities EXTERNALITIES IN REGULATION ﬁnancial markets ﬁnd ﬁrm ﬁrst order conditions ﬁrst term foreign banks form a regulatory higher regulatory standards impact of increased implies incentives increased regulation independent national regulators independent regulators INTERNATIONAL MONETARY FUND level of integration level of regulation lower regulatory standards multiple regulators Nash Nash equilibrium negotiated outcome objective function optimal paper Pareto improvement positive previous section proﬁtability Proof reaction functions regulators prefer regulatory beneﬁt regulatory capture regulatory instruments result satisﬁes speciﬁc stability U1 hf under-regulate WLOG